Australia’s largest superannuation fund, which invests more than $30 billion on behalf of 1.4 million working Australians, has this week quietly removed its ethical exclusion policy.
Simply put, the door is now open for Australian Super to invest in "vice".
Previously excluded from the fund’s "sustainable" options were companies deriving more than 5 per cent of their revenues from the "manufacture or sale of alcohol or tobacco, the operation of gaming facilities or the manufacture of gambling equipment, uranium extraction or the manufacture of weapons or armaments".
In its place, Australian Super has devised a "best-of-sector" approach which no longer requires it to exclude anything. Instead the fund seeks out and invests in companies which perform more "socially responsibly" than their peers — an approach which ultimately seeks to be prosperous, rather than virtuous.
Disappointingly, announcements like Australian Super’s are becoming more widespread across the investment industry. Since 2006, a group of investors and service providers marshalling some $18 trillion in assets globally have committed to implementing the United Nations-backed Principles for Responsible Investment (PRI), an initiative aimed at helping investors act with an awareness of environmental, social and corporate governance issues.
However, the PRI describes itself as a set of "aspirational and voluntary" guidelines only, and according to recent remarks by its executive director Dr James Gifford, the PRI encourages its members to "recognise that they are not coming from an ethical perspective … they are coming from a perspective that is more centred in the economy". More mainstream investors consider their sole duty to be the augmenting of the fund in the (financial) "best interests" of its beneficiaries, and to only exercise their power for a "proper purpose". Neither view has any time for ethics.
The announcement by Australian Super was especially significant, not just because of its size, but because it had arguably gone further by offering its members an ethical option, only to then slip into the murkier waters of "sustainability". For instance, having previously excluded weapons manufacturers from their investment portfolio, now firms that produce cluster munitions — which are currently being addressed under international law — could find their way into the fund’s investments.
But how likely is that really? Very likely, actually.
A review of Australian Super’s funds indicates that the fund hires a number of investment managers and service providers which are known to have some commercial involvement in the weapons manufacturing industry.
For instance, seven of the investment managers hired by Australian Super are known to invest directly in corporations such as Textron Inc (US), Alliant Techsystems Inc (US), and Lockheed-Martin (US) which are involved in either the production of cluster munitions or their components. A further three investment managers, in their capacity as investment banks, are known to have provided loans and related services to many of these same companies.
Without a predefined set of ethical exclusions, Australian Super needs to publicly disclose the nature of its investment holdings, as well as what, if any, engagement has taken place between the companies, the fund and its service providers. Alarmingly, however, Australian Super’s track record on disclosure is not overly impressive.
Consider the fund’s rather self-contradictory approach to remuneration issues. When it votes on remuneration matters concerning companies it has invested in, Australian Super looks like a fairly responsible defender of sound governance and prudence regarding executive remuneration. The fund has voted against more than 130 proposed resolutions on remuneration, presumably because those proposals were not properly explained, not justified, or simply proposed excessive termination and cash payments.
Taking an active position relies heavily on the fund’s engagement service provider, the Australian Council of Superannuation Investors (ACSI), whose guidelines "encourage a narrative approach to remuneration reporting whereby companies use the remuneration report to explain why remuneration practices are appropriate for the company and those covered by the report". In a submission to the Federal Government in June last year, ACSI went so far as to state that, "remuneration provides one of the few visible proxies for shareholders to gain insight into whether boards are exercising effective control and monitoring of executives."
That sounds fair enough, yet when it comes to reporting its own business practices, Australian Super does not disclose to members how its trustee board or management are remunerated, offering merely a cursory statement in its annual report that directors are provided "a modest fee for carrying out their duties".
Four leading research houses give the fund "top marks" for the way it is managed, operated and governed. To the average member that would suggest that Australian Super is one super fund they can trust. But from today its members have no option: having removed its ethical exclusion policy, 1.4 million Australians are being asked to trust the fund’s private judgement on matters it once made clear to them in public.
Australian Super claims that it will nevertheless "remain socially responsible". To my mind, with all the signs pointing otherwise, it’s difficult to see how that can be true.