5 ESG Risks To Focus on in 2015

It is the time of year for lists and reviews of the year. Whilst climate change came back on the agenda in 2014 thanks to the US and China deciding to play ball, here are five ESG risks that will become increasingly important in 2015:

1. The Transformational Power of the Internet of Transparency

Smart phones are transforming the way that people interact. Internet is now available 24-7. The Spring Revolution was supported by social media such as Twitter. In 2014 China began a corruption crackdown. The conclusion of China experts is that whilst there is a political element behind the crackdown, there is also a realisation in the upper echelons of the Communist Party that they are unable to stop online chatter about the corruption of local officials.

The transformational power of the digital revolution is not about creating the Internet of Things but about the Internet of Transparency.


2. Wall Street’s Cell Phone Litigation Problem

Wall Street execs were the first to use cell phones. They have used them the longest and the most intensively. They were the first to upgrade to more powerful units. It is perhaps not surprising therefore that it is Wall Street firms that are the ‘canary in the mine’ in terms of litigation around the health impacts of long term cell phone use.


3. The Uncomfortable Truth about Taxation and Investment

Governments will consider reforms to corporate taxation because they have to. They simply cannot afford to lose revenue from their budgets at a time when their fiscal position is so tight – and will only become tighter as the looming demographic bills for health and pensions become due.

It is not a question of whether governments will act, but how. Already in 2014 we have seen governments act. We will see more in 2015 and company taxation practices will increasingly come under the spotlight.


4. Inequality on the Rise

In 2014 Thomas Piketty launched Capital in the Twenty First Century. Labeled the most important economics book since Friedman, Piketty has brought inequality back as a mainstream topic. But the reason is because there is a reality that is biting. We are seeing the issue feed through into minimum wage campaigns in the US and UK and can expect more in 2015.

Why Fast Food Strikes in US will not go away – and what McDonalds needs to do about it

5. Asbestos: The Forgotten ESG Risk That Just Won’t Go Away

The global asbestos trade is worth around $500 million, with India importing $235 million. The use of asbestos, particularly across Asia, continues to rise. Its main use is in construction for industrial use, but it is increasingly being used as a low cost ingredient in cement for residential housing. Investors will not just be exposed to future litigation. Asbestos is a classic universal case study, where the impacts of asbestos related diseases will impact the whole of society through increased health costs and reduced economic productivity.


Have a great holiday season. See you back in 2015.

Why China’s corruption crackdown will lead to a correction in Australia’s housing market

Australia’s housing market is headed for a correction. Housing investors have heard this so many times over the decades that they have become immune to hearing it.

The market is overheated, but the question is where will a correction come from?

The answer is China.

In 2013 China was the largest source of foreign demand for Australian real estate with $5.9billion invested. We can expect 2014’s figures to be greater with the Foreign Investment Review Board approving $17billion of applications to buy Australian real estate in 2013.

However, the China ‘river of gold’ is about to dry up. The reason is China’s crackdown on corruption.

Last week the Chinese Communist Party announced the arrest of Zhou Yongkang, who was once the third most powerful man in China. The arrest of Zhou Yongkang does have something to do with local politics, as Zhou was a patron of disgraced Bo Xilai. But there is a larger story here.

Since the rise of China’s President Xi, there has been a high profile focus on corruption. In July, China’s press agency Xinhua announced Operation Fox Hunt to “block the last route of retreat” for corrupt officials. The Chinese Government recently sent 20 teams across Asia, including Australia, to investigate officials who had left the country. The Government made 180 arrests as a result.

China is believed to have found more than 13,000 officials guilty of corruption in the first nine months of 2014.

Corruption in China has been endemic across the dynasties. In recent years, China’s problem has been the rise of ‘princelings’ – the sons and daughters of Chinese officials who were living lavish lifestyles. The anger at princelings has surfaced on a number of occasions and has surprised China’s communist hierarchy.

China’s censoring of the internet is well known. Even so, there has been a massive rise of social media. The conclusion of China experts is that whilst there is a political element behind the corruption crackdown, there is also a realisation in the upper echelons of the Communist Party that they are unable to stop chatter about the corruption of local officials. The fear is that anger at this corruption has the capacity to create the kinds of responses that were seen in the Spring Revolution in North Africa.

In short, China’s Communist Party has come to the realisation that its hold on power will be determined by the way they handle corruption.

For Australian real estate what this means is that the driver of investment from China has changed. In the last five years there has been strong appetite to invest as a way of Chinese investors securing capital.

But transferring capital to Australia now raises new questions. In the current climate Chinese investors are unlikely to want to draw attention to themselves by transferring large amounts of capital internationally. This is not to say that the capital is illegal, it is simply human nature to want to lay low when there is such intense political scrutiny of transfers.

The transfer of capital to Australia will not stop. But it will significantly slow down. When it does will be hard to judge and will be determined by how much is already in the pipeline.

But over the next 18 months we can expect a significant slowing of Chinese capital investing in Australian real estate.

This may well be the trigger that will lead to an assessment of housing value, and a correction in the market.

Why it is time to focus on the economic development of Australia’s regions

It is pretty obvious that Australia is a big continent. What is less obvious is why our regions have been so economically constrained and what we can do about it.

Over the last twenty years, as Australia’s cities boomed, the conversation about economic development in the regions was sporadic – but never dominant. Whitlam’s support for economic development of Albury-Wodonga, or Windsor and Oakshott’s support for the regions represent blips in a debate that has otherwise focused on the economic benefits of urbanisation.

Policy makers may not have said it, but there has long been an assumption that it is the economic growth of cities that matters most. Whilst there is no doubt that urbanisation is one of the megatrends of our time, we need to start to integrate regional and city economic development if we are to ensure that scarcity pressures in our cities do not lead to an imbalance in our national economy.

From London to New York we are seeing price pressures in major cities. There is no reason to expect that pressures will subside any time soon. The reason for this is that the factors that are driving price increases will continue. A major driver of price is emerging markets such as China where private wealth is seeking to secure capital by investing in premium property in established markets. In the Australian context one of the drivers has been Chinese investor interest in residential housing. This is good for Australia’s economy because it stimulates the local construction sector but it also potentially imbalances the economy.

With price pressures in our major cities showing no signs of abating we need to think about the way regions can act as a pressure valve.

Over the next decade we will start to see 4.5 million baby boomers transition from the workplace. For the first time in their history they will be able to choose where they live, rather than needing to live close to where work is located.

The evidence suggests that some baby boomers will actually seek to live in inner city areas where urban amenity is high. But not all baby boomers will be able to afford the sky rocketing inner city prices. For boomers whose superannuation account balances are not large, the regions may be attractive, enabling downsizing whilst maintaining living standards.

However in order for the regions to act as a release valve for cities we need two things; to reform land supply and build infrastructure linkages.

Land supply is a major issue. In a continent as large as Australia, how is it that land pricing is not cheaper in the regions? Economics 101 should suggest that it should be possible to sell a house in a major city where land has a high scarcity value and buy cheaply in the regions where there is far less scarcity pressure. Yes, there is a differential, but is nowhere near what it should be.

The reason for this lies in the way land is managed in regions. Land up to the edge of a town can be owned by a farmer who has no incentive to sell. Even if an individual wished to, land is zoned rural and cannot be used for housing.

The zoning of land made sense in an era where governments had to pay for infrastructure in the form of water and electricity connections, but does it make sense now when it is possible to go off grid?

Improvements in solar technology, water storage and mobile phone connectivity mean that it is possible to live, and indeed build communities, that are not connected via wires and polls to the grid.

This libertine idea that people should be able to live where they choose would send shivers down the spines of town planners who have got used to the power that has been progressively handed to them to control the way we live.

The fear of planners, and politicians, is that if planning was deregulated then it would ultimately result in political demands to retrofit infrastructure. But is this actually the case? If development was allowed with the clear understanding that infrastructure will not follow then the political expectation can be managed.

Another shibboleth that needs to be tackled is the idea that big farming is better than small farming. History has played a part here. There is no doubt that giving returning diggers from World War 1 small plots of land that were destined to fail was not a sensible public policy.

But 100 years later farming is changing. There are now opportunities to build niche farming businesses, and in fact we are seeing more and more innovation in this area of the farm sector. Small farming has an economically important role to play in the agribusiness sector, and yet it is structurally not supported.

Opening up Australia’s regions also needs infrastructure – but it needs is the right infrastructure. In particular we need fast connectivity to the city, both in terms of transport and broadband. We need to dump the idea of a fast train from Sydney to Melbourne and focus on more practical fast connections between major cities and regional centres. This has unfortunately fallen off the policy radar.

If we were able to open up land use in the regions then this would act as a pressure valve on our cities. Price differentials in city and regional housing would enable retirees to unlock capital and maintain living standards in retirement. It would enable small businesses to set up where costs are cheaper. It would enable innovative agribusiness to develop niche products to serve growing global markets.

Achieving change is never easy. Part of the problem is that our so called city slickers need to start thinking about the bush in a different way. The economic challenges that our nation faces however means that this is just too an important piece of reform to ignore.