Dissenting Report
Australian Greens
1.1
The Government Investment Funds Amendment (Ethical Investments) Bill
2011 is being introduced in order to constrain the investments of
government investment funds, namely those created by the Future Fund Act
2006 and the Nation-building Funds Act 2008, to those investments
which are consistent with socially responsible investment practices.[1]
1.2
The Bill will require the creation of Ethical Investment Guidelines
which proscribe investments by the Future Fund and Nation-building Funds in
companies involved in the manufacture of tobacco, cluster munitions, nuclear
arms and other entities to be proscribed under Ethical Investment Guidelines.[2]
1.3
The Bill seeks to make it possible to address the ramifications of an
investment beyond the financial returns, such as the impacts on the
environment, the rights of those employed by the various enterprises, impacts
on human health or potential effect on peace and stability. The Greens consider
that Australia's sovereign wealth fund should endorse international practice on
responsible/ethical investment. Many examples of responsible and ethical
investment guidelines already exist around the world, including superannuation
funds and sovereign wealth funds such as the Norwegian government pension fund.
Need for change in
investment practices
1.4
The committee majority report does not support the bill. The Greens find
this quite perplexing given the significant harms that tobacco, nuclear arms
and cluster munitions cause.
Tobacco
1.5
During the committee's inquiry those who have seen the harm caused by
tobacco voiced their support for the Bill. Australian Council on Smoking and
Health (ACOSH) and Action on Smoking and Health (ASH) submitted that tobacco is
the leading cause of preventable death and disease in Australia.[3]
...tobacco kills more than 15,000 Australians every year and
costs our economy more than $30 billion annually. Cigarettes, when used
precisely as intended, kill one of every two long term users.[4]
1.6
Those views were echoed by the National Heart Foundation and the Australian
Lung Foundation which also submitted that tobacco use, and second-hand smoke
exposure, contribute to 10 to 13 per cent of all cardiovascular deaths.[5]
1.7
Witnesses found it ironic that on the one hand the Government is seeking
to reduce the adverse health impacts of smoking through steps such as plain
packaging legislation, which on the other the Future Fund's investments
increase in value as more and more people become addicted to cigarettes. ACOSH,
for example, stated:
The irony of these investments is that they increase in value
as more and more people become addicted to cigarettes – causing an inherent
conflict of interest in simultaneously investing in the tobacco industry to
make money from this lethal industry, and actively leading the way world-wide
to reduce smoking.[6]
1.8
ASH asserted that 'it is inappropriate for Governments to be investing
in an industry that is both lethal and working actively to undermine, oppose
and subvert government health policies'.[7]
Other submitters including the Australian Lung Foundation and Quit Victoria
raised concerns regarding the Future Fund investments in companies that are
challenging policies and law designed to reduce the harm from tobacco.[8]
Quit Victoria submitted:
...while Australia is expending considerable sums of money to
defend plain packaging laws designed to reduce tobacco consumption, we are also
investing hundreds of millions of dollars in tobacco companies who are fighting
to have these laws overturned.[9]
1.9
The Royal Australasian College of Physicians (RACP) submitted that 'tobacco
policy must be considered as a system of actions aimed at denormalising tobacco
use, where any number of positive actions can be undermined by smaller negative
actions' and that the Government's investments via the Future Fund undermine
the denormalisation of tobacco use at work in other policy instruments.[10]
RACP commented on the international impacts of tobacco:
Tobacco companies key growth markets are developing
countries. The World Bank estimates that 84 per cent of the world’s smokers
live in developing countries and that 80 per cent of tobacco deaths by 2025
will be in developing countries.[11]
1.10
A further matter of significant concern is that Australia is a signatory
to the World Health Organisation Framework Convention on Tobacco Control
(FCTC). The FCTC includes obligations to protect health policies from the
tobacco industry.[12]
Article 5.3 of the FCTC states that:
In setting and implementing their public health policies with
respect to tobacco control, Parties shall act to protect these policies from
commercial and other vested interests of the tobacco industry in accordance
with national law.[13]
1.11
In November 2008, the World Health Organisation FCTC governing body
adopted guidelines for the implementation of FCTC Article 5.3, which included a
recommendation that:
Parties that do not have a State-owned tobacco industry
should not invest in the tobacco industry and related ventures. Parties with a
State-owned tobacco industry should ensure that any investment in the tobacco
industry does not prevent them from fully implementing the WHO Framework
Convention on Tobacco Control.[14]
1.12
Many witnesses pointed to these obligations and questioned the Future
Fund's investment in some 14 tobacco companies.[15]
The RACP commented that 'it is difficult to understand how the Future Fund’s
investments in tobacco producers are not in the very least inconsistent with
the intent of the FCTC'.[16]
1.13
While the Future Fund has been made aware of the FCTC through
representations of organisations such as ASH, it has chosen not to act on the divestment
of its investments in tobacco entities. ASH stated:
We did write to the former chief, David Murray, and also to
the relevant ministers, including Penny Wong. I suppose the most positive
response, if we could put it that way, was that they are going to review their
investment strategy, but that is about as far as it went. We drew to their
attention the legal treaty obligations, but they did not refer back to those in
any response.[17]
1.14
The Greens note that that the Department of Health and Aging submission
stated that should the proposed Ethical Investments bill be passed, its intent
to specify prohibited financial assets, including investment in tobacco
companies, would accord with Article 5.3 of the FCTC.[18]
Indeed, the Government pursued reforms including the Tobacco Plain Packaging
Act 2011, which was upheld by the High Court on 15 August 2012. It is
quite perplexing that despite the above achievements, hundreds of millions of
dollars of public funds continue to be invested in tobacco companies as part of
the holdings of the Future Fund.
Nuclear weapons
1.15
In terms of the impacts of Nuclear Weapons, the International Campaign
to Abolish Nuclear Weapons (ICAN) indicated that in its view nuclear weapons
are the most destructive, inhumane and indiscriminate instruments of mass
murder ever created:
Physicians and scientists have long studied and documented
the medical consequences of nuclear war, concluding that human security and
survival depend upon ridding the Earth of these indefensible weapons. Even if a
nuclear weapon were never again exploded over a city, there are effects related
to the production, testing and deployment of nuclear arsenals that are
experienced as an ongoing personal and community catastrophe by many people
around the globe.[19]
1.16
ICAN suggested that nuclear weapons are the only devices ever created
with the capacity to destroy all complex life forms on Earth within a
relatively short period and provided further evidence to quantify the effects
of nuclear weapons:
A war fought using 1000 nuclear weapons – around 5% of the
total global stockpile – would render the planet uninhabitable. In addition to
causing tens of millions of immediate deaths, a regional nuclear war involving
around 100 Hiroshima-sized weapons would disrupt the global climate and
agricultural production so severely that more than a billion people would be at
risk of famine.[20]
1.17
ICAN supported the Bill and suggested that ongoing investments in
entities involved with nuclear weapons may be in conflict Australia's
disarmament obligations and may undermine Australia's disarmament activities.[21]
Australia's international law obligations include compliance with the Geneva
conventions, UN charter, the Non-Proliferations Treaty, the Comprehensive
Nuclear Test Ban Treaty, and the South Pacific Nuclear Free Zone Treaty. ICAN
informed the committee that:
None of these treaties expressly prohibit Australia from
investing in nuclear weapons companies. However, the South Pacific Nuclear Free
Zone Treaty forbids Australia from facilitating the manufacture of nuclear
weapons anywhere in the world, and the NPT requires Australia to advance
nuclear disarmament. Additionally, the simulated testing of nuclear weapons
carried out by the company Honeywell International, in which the Future Fund
invests, is clearly against the spirit of the CTBT.[22]
1.18
Oxfam also suggested that under instruments like the OECD's Guidelines for
Multinational Enterprises issues of an investor's complicity for the activities
of a company in which it has invested have become a more prevalent
consideration. Oxfam stated that:
Those obligations, and consequences, fall equally on states
seeking to intervene in private markets under similar conditions. ... Sovereign
Wealth Funds are public institutions but functionally they are generally
expected to be private actors. Such expectations fail to take into
consideration that given their connection to the State, they could be held to
an even higher level of obligation than truly private actors.[23]
1.19
ICAN asserted that there is significant support in Australia for the
divestment of entities involved with nuclear weapons, drawing attention to the
parliamentary resolution on support for a world free of nuclear weapons:
There was a rare display of bipartisan support in the
Australian parliament in March this year for a parliamentary resolution on the
unanimous recommendations of the Joint Standing Committee on Treaties affirming
the Australian parliament's support for the goal of a world free of nuclear
weapons and the exploration of legal frameworks for their abolition. I think
there is an extraordinary depth of support for the position that nuclear
weapons are an enormous threat and Australia's objective is their elimination.
Therefore, the divestment of public funds from their manufacture would be an
important pro-health and pro-sustainability position to take, and I think it
would be a very desirable development for the Future Fund and would build on
its commendable divestment of its investment in cluster munitions—companies
that manufacture those.[24]
Reputation impacts
1.20
The Future Fund's investment mandate requires the Board to consider the
impacts of its investments, including acting in a way that is unlikely to cause
any diminution of the Government's reputation in financial markets.[25]
1.21
The Future Fund and the Department of Finance and Deregulation (the
department) both argued that the reputation of the Future Fund is very
important to its ability to conduct its commercial operations and that the Bill
would damage its reputation.[26]
However, evidence was received from the witnesses which pointed to the very
real risks for the Government's reputation that continued invest in entities
involved in tobacco and nuclear weapons will have. The National Heart
Foundation commented on the damage to the Government's 'unblemished record on
tobacco control' that resistance to
disinvestment in tobacco will cause.[27]
The RACP also argued the Government's leadership in in global efforts to
minimise the harm from tobacco use will be undermined.[28]
Responsible/Ethical
Investment practices
1.22
In addition to the background material set out in chapter 1 of the
committee's report, in this section we draw attention to some further
information on responsible and ethical investment. As noted in chapter 1 there
has been a steady development of Sovereign Wealth Funds (SWFs) since the 1970s
and they now have very significant impacts on investment markets. Over a
similar period and following on from earlier specific examples there also been
considerable interest in and development of responsible and ethical investment
practices.
Responsible investment is a practice that has evolved and
matured within the last four decades and now encompasses a broad range
methodologies and approaches. ... Common words used in this space include
ethical investment, sustainable investment and socially responsible investment.[29]
1.23
Responsible/ethical investment is now a healthy and growing
aspect of the investment industry and is instrumental in improving investment
strategy and processes. Australian institutional investors have been recognised
through signatory support of the United Nations Principles for Responsible
Investment (UN PRI):
In fact Australia boasts the largest proportionate signatory
base in the world, resulting in over 60% of all funds under management in
Australia now being part of that global program.[30]
1.24
Oxfam suggested that responsible/ethical investment has particular
applicability to sovereign wealth funds, with Norway and New Zealand being
excellent examples. Oxfam went to note that:
This applicability derives from the peculiar position of a
sovereign wealth fund as a form of public institution but one which operates in
the investment market as a private investment actor. Unlike other solely
private actors, sovereign wealth funds have additional responsibility to comply
with international law and the obligations entered into by their host states. ...Incorporating
a transparent responsible investment approach will formalise and deliver
clarity to the market on precisely when, where and how Australia's sovereign
wealth funds will balance their public obligations with their private
functions.[31]
Precedents
1.25
While the Future Fund and the department listed some precedents in their
submissions,[32]
there are a range of international precedents for both legislative and
regulatory arrangements that are worth drawing attention to.
1.26
The European Sustainable Investment Forum (EUROSIF) is a pan-European
network and think-tank focussed on developing sustainability through European
Financial Markets. In its 2010 study which details the 2010 status of
Sustainable and Responsible Investment developments in each European country,
EUROSIF reported that 63 per cent of the assets subjected to Sustainable and
Responsible Investment criteria were held by public pension funds or reserve
funds[33]
and that:
Currently, at least eight countries in Europe have specific
National SRI regulations in place that cover their pension systems: United
Kingdom (2000), Germany (2001), Sweden (2001), Belgium (2004), Norway (2004),
Austria (2005) and Italy (2005). Spain is in the process of introducing such
SRI requirements into the existing 2002 Pension Funds law. In Italy, the
disclosure obligations applying to all complementary pension funds started in
January 2008.[34]
1.27
Some laws and/or regulations are focussed specifically on SWFs or
pensions funds, while others that have substantially broader application to
investors generally have also been explored:
The Dutch Parliament recently passed a resolution to ban
cluster munitions for all Dutch investors, which was overturned by the interim
Minister of Finance.[35]
1.28
Assets managed with a simple exclusion strategy mostly originate in the
Netherlands, Italy, Belgium and Sweden, and represent up to 1.0 trillion euros
of investment.[36]
In terms of specific developments in individual countries there are several,
including the following examples, most of which relate to pension or sovereign
wealth funds:
- Belgium – since 2007 financial institutions,
whether public or private, have been prohibited from
investing in companies that produce cluster munitions.[37] Investments in depleted
uranium weapons are now also prohibited;[38]
- Italy – the Assicurazioni Generali insurance company decided in
2006 to invest all of the assets managed by the Group's companies (€299 billion in 2009) in
accordance with the ethical guidelines adopted by the Norwegian Government
Pension Fund;[39]
-
France – since 2001 the Pension
Reserve Fund has a legislated commitment to SRI and an explicit
long-term outlook.[40]
Other legislation bans both
direct and indirect financing of cluster munitions production.[41]
In addition more than half of the Core SRI market is also subject to
land mine and cluster bomb exclusions;[42]
- Sweden – the state pension buffer funds have been followed by
other organisations in adopting SRI practices, which include screening on
environmental aspects, weapons and tobacco;[43]
- USA – the California Employees' Retirement System is a large
pension fund, which has had a responsible investment framework for many years
that relates to human rights labour conditions;[44]
- Luxembourg and New Zealand – have criminalised investment by
public or private entities in companies that produce cluster munitions;[45]
- Ireland – has banned investment of public money in cluster
munitions producers;[46]
and
- UK – since 2010, the
direct financing of cluster munitions production is prohibited, however indirect
financing of cluster munitions is not.[47]
1.29
A detailed list of countries and financial institutions that
exclude investment in cluster munitions is also now published annually,
identifying entities in both a hall of fame and hall of shame.[48]
1.30
Submitters pointed to Norway's Government Pension Fund Global (GPFG) as
a model for ethical investments. The GPFG strongly considers ethics and human
rights in its investment objectives and is perceived as an activist
shareholder. The GPFG also uses exclusions in some cases and is required to not
invest in, or divest from, companies that: produce weapons that violate
fundamental humanitarian principles; produce tobacco; sell weapons or military
material to specific countries highlighted in the GPFG’s guidelines.[49]
In January 2010, the Norwegian Ministry of Finance agreed to exclude 17
tobacco-producing companies from GPFG, based on a recommendation from the
Fund's Council on Ethics.[50]
1.31
The New Zealand Superannuation Fund (NZSF) has had a responsible
investment policy for several years and began excluding companies involved with
tobacco in 2007, and companies involved with cluster bombs and nuclear weapons
in 2008. The background to those decisions is documented and made available
publicly.[51]
A full list of exclusions as at 31 December 2011 is also publicly available.[52]
1.32
The NZSF noted in its 2010–11 annual report that the New Zealand
Superannuation and Retirement Income Act 2001 requires that the overall
Statement of Investment Policies, Standards and Procedures (SIPSP) must cover
ethical investment including policies, standards and procedures for avoiding
prejudice to New Zealand's reputation as a responsible member of the world community.
The SIPSP includes a responsible investment framework to address ESG issues,
which has work streams closely aligned with UNPRI. The annual report sets out
the NZSF activities undertaken under the work streams.[53]
Impact on returns
1.33
It is a common criticism of responsible and ethical investment that, by
restricting the diversity of investments (the investible universe), investment
returns are automatically going to be restricted. RIAA disputed those criticisms,
stating that:
History has shown that there is much more complexity in the
process than that. Ethical investment funds do tend to be competitive in terms
of financial returns over time. It is not the case that by adopting an ethical
investment policy you are necessarily going to restrict your portfolio to the
extent where you are going to have a negative impact on returns. The two
statements do not link.[54]
1.34
Oxfam supported the above view and indicated that, in its view, returns
over both the short and long term can be enhanced:
Importantly, the evidence demonstrates that in comparison to
conventional investment techniques responsible investment offers competitive
returns in the short term and often better returns in the longer term. These
are key considerations for the funds targeted by this bill, focused as they are
on strengthening the Australian government's long-term financial position by
making provision for unfunded Commonwealth superannuation liabilities.[55]
...in the Canadian equity fund class, the average of
responsible investment funds outperformed the average of all Canadian
investment funds on a one, three, five and 10-year basis. We cite that 11 of
the 15 funds in that category outperformed the industry average on a one-year
basis. That is one example and there are other examples both in our submission
and beyond that.[56]
1.35
The RIAA submitted a summary of analysis to demonstrate examples of
enhanced returns for responsible and ethical investment:
The RI Annual Benchmark Report of 2011, produced annually by
RIAA, demonstrates how specialist responsible investment funds have
outperformed their benchmarks in every one of the twelve categories covered in
the report over one, three, five and seven years across Australian shares,
international shares and balanced funds.[57]
1.36
ASH submitted other evidence of enhanced returns in Australia:
Grouped together, ''ethical'' funds are outperforming their
mainstream counterparts. According to Morningstar, Australian share funds that
invest ethically produced an average annual return of 4.65% over the five years
to July 31, 2010, compared with 4.21% for mainstream share options.[58]
1.37
Additional evidence was provided by Mr Tomohiro Matsuoka which drew
attention to international experience on maintaining financial performance
while investing responsibly, including when screening companies involved with
landmines and cluster bombs:
Many of the European financial institutions practising SRI
already have a long history of doing so, and there is no specific evidence that
it affects their financial performance.
For those practising responsible investment—such as
screening companies for involvement with antipersonnel landmines or cluster
munitions—there is no record that they underperform. There is no track record
of that. So there is no evidence that practising responsible investment damages
financial performance.[59]
1.38
Information from the Future Fund supports the above arguments. Prior to
its divestment, the rates of return the Future Fund was achieving on its
investments in companies involved with cluster bombs, were negative for most of
the companies.[60]
1.39
The Future Fund has $179 million invested companies involved with
nuclear weapons,[61]
and $225 million in companies involved with tobacco.[62]
Put together these represent a less than half of one per cent of the total
value of the Future Fund. Therefore it is hard to see how it could be
justifiably claimed that divesting those companies would have a material impact
on overall fund returns. Information from New Zealand supports this argument:
The NZSF noted that its total tobacco company holding
amounted to just 0.29 per cent of the total fund. In their decision, the
Guardians noted that divestment from the tobacco sector would have an
immaterial effect on the expected efficiency...of the Fund’s portfolio. This is almost identical to the Future Fund,
whose estimated $225 million holding represents 0.29 per cent of the $77.05
billion total (as at 31 March 2012).[63]
1.40
The Australian Lung Foundation also suggested that investments in
tobacco companies were not needed to achieve the Future Fund's target returns.
The Australian Lung Foundation cited the example of First State Super's
exclusion of companies involved with the manufacture of cigarettes and other tobacco
products:
On the 19th of July
2012, First State Super announced that they have excluded companies involved in
the manufacture of cigarettes and other tobacco products from their entire
investment portfolio.
In the announcement, CEO Mr Michael Dwyer stated that their
decision will have inconsequential impact on investment returns.[64]
1.41
Based on the above arguments, it is therefore possible to conclude that
responsible/ethical investment is a well-known, well-developed and appropriate
path for the Future Fund to take, that will not have a material impact on
returns and is likely to enhance its reputation.
Applicability to the
Future Fund
1.42
The applicability of responsible/ethical investment practices to
investment managers has been previously addressed, from a reporting perspective:
The Financial Services Reform Act 2001 requires
product disclosure statements issued in respect of managed investment funds and
other investment products to disclose the extent to which labour standards or
environmental, social or ethical considerations have been taken into account by
the manager of the fund or product in selecting, retaining and realising
investments.[65]
1.43
A suggestion that the Future Fund adopt a responsible investment policy
was made as early as November 2005 by the Institute of Sustainable Futures at
the University of Technology Sydney.[66]
1.44
Prior to the establishment of the Future Fund, the Senate Economics Legislation
Committee noted the appropriateness of including important principles in the
directions to be given to the Board under the investment mandate.[67]
That committee also heard evidence from Mr Easterbrook of Corporate Governance
International that:
...the Future Fund provides a major opportunity to be a market
leader in terms of best practice...two particular areas for consideration,
specifically voting policy and engagement with companies in which a
shareholding is held.[68]
1.45
The Future Fund has set up ESG policies and claims that it is pursuing
global best practice.[69]
Other witnesses such as RIAA and Mr Matsuoka rejected that view. RIAA stated:
Not wishing to sound critical of what they are doing, I do
not think the Future Fund is achieving best practice in all of the different
aspects of the UN PRI that are out there. Certainly I am thinking here in terms
of reporting and things like that.[70]
1.46
Mr Matsuoka went on to comment:
To be honest, I have a bit of a sceptical view about the
current practice of the Future Fund. I think they can do even more. I just read
the response from the Future Fund. If they are prepared to provide this kind of
answer, then I think they are able to practice more responsible investment. To
set the very basic mandate, it is good to have legislation.[71]
1.47
When asked about influencing the behaviour of tobacco companies under
its ESG policy, the Future Fund stated that:
...we do apply our environmental and social governance policies
clearly against all of our investments as well, so where we invest in any
industry we ensure, for example, that the industry is acting in the right way,
is adhering to the best corporate principles and is doing the right thing by
its fiduciary duties.[72]
1.48
Quit Victoria, however, rejected the view that influencing the behaviour
of tobacco companies was of any value:
There is no improvement on a tobacco product, I think. As you
say, $200 million or whatever is invested in the tobacco industry is funding
their activities, and essentially one in two people who uses their product
dies. There is no safe level of smoking. There is nothing we can do to tobacco
products to make them safer.[73]
1.49
Continuing to invest in entities involved with tobacco and nuclear
weapons also provides clear evidence that the Future Fund is not currently
operating at best practice. Oxfam saw the Bill as being able to bring the Future
Fund into alignment with best practice:
Responsible Investment has developed in light of this
recognition, and its incorporation into the investment practices of the Target
Funds through this Bill will see Australia again at the forefront of
best-practice in the financial and investment sector.[74]
We recommend to the committee that it support the adoption of
responsible investment as an investment strategy, because it is compatible with
the legal obligations of investors, as well as being essential to best practice
risk management.[75]
1.50
During the inquiry, some concerns about responsible and ethical
investment were raised. ASH countered the four most common arguments that are
used by opponents of responsible investment guidelines:
The first one is that it [tobacco] is a legal product. There
are lots of products that are legal—munitions, methadone, pornography—but many
of these are restricted for social and health reasons...
The second common argument is that funds should be
independent and free of political interference. The Future Fund Act, subsection
18(10) requires the board to maximise returns consistent with international
best practice and subject to any conditions given by the responsible ministers
under subsection 18(1)...
The third common argument is that a fund's duty is to its
investors. The duty of an investment fund is to maximise returns for its
members—we know that—usually subject, however, to some direction and in
accordance with best practice...complying with treaty obligations like the FCTC...
Lastly, a common argument is that tobacco is a good
investment. Economic evidence shows that funds can perform well if not better
if they adopt socially responsible investment guidelines. In contrast, the
tobacco industry has been described as a sunset industry. Its long-term future
is in doubt.[76]
1.51
Another criticism of responsible and ethical investment is that it is
too difficult to work out what companies are involved in. For example, the
Future Fund claimed in its response to questions on notice that it was not able
to identify whether companies it had invested in, were involved with nuclear
weapons.[77]
Other witnesses, including ICAN, rejected that view:
The companies that we have included in our submission, as the
Future Fund having investments in, are not companies that are producing
paperclips, dual-use items or things that are not specific to nuclear weapons
or their delivery systems. These are companies that are integrally involved in
the production of key nuclear weapons and delivery system components. .... In
our report we have applied certain benchmarks for the size of the engagement
and for the specificity of the involvement. I think there are ways of doing
this in a transparent and consistent way, but I would certainly argue that key
components of nuclear weapons and their delivery systems that are really
integral and essential for those are possible to define.[78]
1.52
Some other criticisms that are specific to the Bill were made during the
inquiry. One of the criticisms was that the Bill does not specify in detail the
definitions or universe of proscriptions that would or could apply. While the
issues raised around clarity are valid, it is anticipated that the responsible
Ministers (in conjunction with the Future Fund) would ensure that adequate
detail was present in the Future Fund Ethical Investment Guidelines required
by the Bill.
1.53
The issue of a hierarchy of priorities, or competing priorities between
the Investment Mandate and the Ethical Investment Guidelines is a valid concern.
This matter can be easily resolved by clarifying the relationship clearly in
the guidelines or in the Mandate.
1.54
Some of the concern expressed was about ambiguities in the proposed
Guidelines. This would be a matter for the responsible Ministers to resolve
according to the powers granted to them by the Bill. However, I note that these
concerns did not apply to a simple list of exclusions which could be introduced
as a short-term alternative to accomplishing the Bill's stated purpose in
causing the fund to divest of tobacco and nuclear weapons stocks.
Independence of the Future Fund
1.55
A key issue raised during the inquiry was the independence of the Future
Fund from government and I acknowledge the importance of that independence. The
proposed guidelines should allow continued independence regarding individual
investment decisions as set out in section 18A of the Future Fund Act 2006 (FF
Act). To facilitate independence, the Future Fund could develop the
guidelines and provide them to the Government and Parliament for approval.
1.56
It is worth noting that existing powers under section 18 of the FF Act
may be sufficient to bring about the changes sought. The existing powers of the
responsible Ministers could be used to issue a new investment mandate that
emphasised responsible investment without specific exclusions or interference.
It is also within the Fund's powers to make those exclusions themselves without
any change as they did with cluster munitions. The Bill has specific advantages
in terms of making the changes explicit and ensuring that they are endorsed by
Parliament.
1.57
In addition to the above safeguards, the Future Fund has contributed to
the development of the Santiago Principles, which are among other things,
designed to mitigate political interference in the operation of sovereign
wealth funds. Oxfam submitted that:
The Santiago Principles of the
International Working Group of Sovereign Wealth Funds attempt to address this
by imposing requirements for transparency and disclosure of investment decision
making. For instance at GAPP 19.1 they state that, "If investment
decisions are subject to other than economic and financial considerations,
these should be clearly set out in the investment policy and be publicly
disclosed." Such an approach prefers an up-front, publically disclosed
Responsible Investment policy to an ad-hoc investment strategy imposing ESG
factors inconsistently and privately by the investment managers of a SWF. As such,
this Bill provides the transparency and clarity required by the Santiago
Principles of Australia's SWF.[79]
1.58
During the inquiry it was also pointed out that the Bill would influence
the investment practices of the government and its affiliated bodies, and in
doing so, would function as exemplary to wider financial communities both
within Australia and outside Australia.[80]
Mr Matsuoka informed the committee that the European and New Zealand responsible
investment initiatives had a huge impact on the financial community:
...because not only was it, first of all, a sovereign fund but
it was also prescribed in the legislation. It did not specifically designate
responsible investment; however, the first CEO of the New Zealand Super Fund
interpreted this legislation as meaning practising responsible investment, and
this became a kind of model in the industry.[81]
That is the case in Northern Europe. I mentioned the
Norwegian fund case. That set the example in the industry. It is getting more
widespread among particularly super funds, both public and private, in Northern
Europe.[82]
1.59
The RIAA also supported this view, submitting that:
The consideration of ESG issues by large institutional
investors such as government investment funds is therefore not just an issue of
enlightened self-interest, but plays a key role in improving overall market
standards, generating better market returns and reducing systemic risk. [83]
Conclusion
1.60
Evidence presented to this inquiry demonstrates that the harm caused by
tobacco, nuclear weapons and cluster bombs is devastating both to Australia and
other countries. While it is good that the Future Fund has divested its
investments in entities involved with cluster bombs, it seems clear that it
will not divest its investments in entities involved in tobacco and nuclear
weapons of its own accord under its current governance arrangements. This state
of events is both unnecessary and ethically untenable, creating a clear need to
establish better governance arrangements to empower the Future Fund to make the
necessary divestments.
1.61
The Bill seeks to make measured and appropriate changes to the
governance arrangements. The changes would make explicit, powers that arguably
already exist under the Future Fund Act 2006. There are precedents in
private industry and international sovereign wealth funds for responsible
investment practices, such as those proposed in the Bill. Evidence from a range
of sources suggests that returns will not be compromised. For tobacco and
nuclear weapons in particular, they represent such a small fraction of the
Future Funds' total value, that it is highly unlikely that divestment would
have any material impact on returns.
Recommendation 1
1.62
The Australian Greens recommend that the Bill be amended to
clarify the interaction between the Investment Mandate and the Ethical
Investment Guidelines.
Recommendation 2
1.63
The Australian Greens recommend that the Government Investment Funds
Amendment (Ethical Investments) Bill 2011 be passed.
Senator
Richard Di Natale
Senator for Victoria
Navigation: Previous Page | Contents | Next Page