A feel-good win in the global battle for capital

Monday, 26 March 2018

The Trump administration’s success in pushing through a cut in the US corporate tax rate has re-enlivened teeth gnashing in Australia about our own company tax rate for fear of being “left-behind” in the global race to attract capital.  The ripple effects roll on this week, with the Government stepping up its case for a tax cut and the opposition pushing on with its proposed wind-back of the dividend imputation system.

There is no doubt that comprehensive tax reform is long overdue in Australia, however, whatever the outcome – the reality is that global businesses will continue to look to deploy capital in Australia because it is a good place to operate, not because of the tax regime.  Our robust legal system, abundant natural resources, educated workforce, wealthy consumer base, and proximity to Asian markets means Australia is an attractive place to invest.  This has always been the case despite a relatively high corporate tax rate. 

Tax can never offer a lasting comparative advantage because other countries can always respond.  This means it’s incumbent on Australia to think more broadly about how to attract investment – i.e. are there ways that play to Australia’s real strengths to draw in capital we’re currently missing out on?

One area ripe with opportunity is the money flowing into “for-purpose” or Environment, Social and Governance (ESG) type investments.

The shareholder primacy model (that companies exist only to maximise profits) is under serious strain globally.  There is a growing mood to have businesses run in a way that considers a broader range of stakeholders.   In 2017 alone:

  • US$59 trillion was invested globally in accordance with the UN Principles for Responsible Investment (based on ESG factors); 
  • the Climate Action 100+ initiative was launched by investors with US$26 trillion under management with a mandate to force action by the world’s 100 biggest polluters; 
  • Swiss Re announced that all investment decisions impacting its US$130 billion portfolio will be based on ESG and related factors, while the CEO’s of two of the biggest investors in the world, State Street and BlackRock, declared that they consider environment and community impact as factors that go directly to sustainability and a company’s long-term prospects; and
  • it was estimated that approximately US$93 trillion in funding will be required to enable the 2015 Paris Agreement signatories to deliver on their greenhouse emissions targets, with China alone needing to invest over US$1.5 trillion in green projects between 2016 and 2021 to meet its target.

All this makes you think – there are oceans of portable ESG focused capital out there and lots of entrepreneurs and businesses that would love the chance to get it. These businesses will want a stock exchange that maximises their chances of accessing this capital and the investors will want a jurisdiction they are comfortable with.  Hello Australia.

Exchanges globally already differentiate themselves in the battle to attract companies looking to raise funds and go public.  There is fierce competition going on right now between the Hong Kong, Singapore and Shanghai exchanges to attract “new economy” businesses.  Hong Kong in particular, still reeling over the NYSE listing of Alibaba, is considering significant changes to its listing rules to attract big tech businesses – including permitting shares with variable voting rights – making a listing on the HKE more attractive to tech founders.  This is in direct response to the competitive threat of the US exchanges which have deep liquidity and, perhaps more importantly from a founder perspective, a more or less anything goes approach around founders retaining control.  Hong Kong is also changing its listing rules to push hard for biotech businesses – another category of listings with big future upside (dropping restrictive profit and revenue requirements).

This shows that listing platforms are in serious competition with each other for portable capital because becoming the bourse du jour for companies with significant upside is an opportunity worth pursuing.

With this in mind - why can’t Australia better position itself to attract the growing volume of ESG capital?  This would involve facilitating the listing on the ASX of a corporate structure which is for-profit, but with expanded obligations to a broader sub-set of stakeholders and to drive positive impact for the environment, society and employees (an equivalent to the benefit corporation concept in the US).  Changes to our Listing Rules would be required to reflect the different purposes, disclosure practices and obligations of those entities.  It wouldn’t be that hard in the scheme of things. Our Listing Rules already provide for different categories of listings with tailored disclosure and reporting requirements.  This would be just another new category – the listed for-purpose vehicle.  This package would be appealing to a company looking to list and run for profit, but that is also serious about its commitment to non-profit-maximising ESG purpose.  In the same way Hong Kong considers that introducing variable voting rights will attract businesses with specific needs, a “listed-for-purpose” structure will do the same for founders and investors looking for a platform tailored for a listing in a post-shareholder-primacy world.

The concept of a stock exchange that embraces “for-purpose” companies isn’t entirely original.  Several start-ups around the world have tried to engineer that kind of platform, but none have the backing of a respectable, established and deep exchange anything like the ASX. 

Setting up Australia to compete for this capital would not cannibalise existing markets or government revenue sources – it would be 100% accretive.  It also capitalises on our strengths as a jurisdiction – if you’re going to list a business intending to have a positive global impact, why not do it in Australia?  A liquid market, an educated workforce and a prosperous economy at Asia’s doorstep, surrounded by the world’s best beaches and national parks – a reminder of why you care about this stuff in the first place.

 

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“Fishing with dynamite – the fight against short-termism” is a collection of articles and posts that pick at these issues with a hope of sparking debate and exploring noteworthy proposals. 

 

 

 
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