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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2009-03-25 Daily Xml
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ECONOMIC AND FINANCE COMMITTEE: ETHICAL PUBLIC SECTOR SUPERANNUATION SCHEMES

Mr RAU (Enfield) (11:15): I move:

That the 68th report of the committee, entitled Ethical Public Sector Superannuation Schemes, be noted.

Again, I stand in the stead of the honourable member for West Torrens. I believe this is his swansong in terms of contributions from the committee, and I will not burden people with another rip-off of William Shakespeare.

The Hon. I.F. Evans interjecting:

Mr RAU: Indeed; very good. This report is entitled 'Ethical public sector superannuation schemes'. This inquiry was referred to the committee by this house, and I am pleased to report back on behalf of the committee in relation to its findings. The committee was asked to investigate and report on the principles and application of ethical and sustainable superannuation and investment options for state public sector and parliamentary superannuation schemes.

Members will accept, I suggest, that the primary objective of those who invest and manage superannuation funds is the attainment of maximum returns for their clients. Most people have been disappointed in that respect over the past 12 months.

The Funds SA Act, by which I refer to the relevant legislation, provides Funds SA as the entity to determine the investment strategy of public sector superannuation in this state and tasks it with achieving the highest return possible on investments. The committee sought to understand whether and, if so, how ethical considerations operated within these established parameters.

The committee heard that socially responsible investing (SRI) developed as a niche segment within the investment and superannuation sector during the 1980s and has flourished in the years since. In broad terms, this involves building an investment portfolio out of only those companies and investments that meet a set of prescribed ethical or sustainable criteria.

These funds are offered on the basis that investors will opt in and choose them to the exclusion of other funds, essentially because they have some sort of commitment to these. In the superannuation context, this means providing a particular fund and giving investors the ability to opt out of the default funds.

The committee was told by Funds SA and Super SA that, while surveys reveal high consumer approval for these funds being available, the actual take-up rate is very low. Funds SA told the committee that the typical take-up rate was below 1 per cent. Super SA and Funds SA told the committee that their preferred approach was one, in effect, that makes the default option an ethical one.

The committee was told that environmental, social and governance (ESG) investing represents a more holistic approach to investment funds that does not require the construction of often narrowly defined portfolios; after all, one person's ethical portfolio is not necessarily the same as another's.

Both Funds SA and Super SA recommended the United Nations Principles for Responsible Investment which were promulgated in 2007 and which have been signed up to by some of the funds managers. These are voluntary and aspirational principles which provide a menu of possible actions for incorporating these issues into mainstream investment decision-making and ownership practices. The principles are:

1. Incorporating these issues into investment analysis and decision making.

2. Being active owners and incorporating these issues into ownership policies and practices.

3. Seeking appropriate disclosure.

4. Promoting acceptance and implementation of these principles within the industry.

5. Working together to enhance effectiveness in implementing the principles.

6. Reporting on activities and progress towards implementing the principles.

I am not sure I understand what all that means, but that is what the United Nations came up with.

Part of the practice on the part of fund managers was to exercise their corporate voting rights as investors with these principles in mind, in effect, to encourage enlightened behaviour on the part of companies in whom they invest. The primary principle of active investment is engagement rather than exclusion.

The committee received evidence to the effect that fund managers who operate under these principles strongly believe in the positive effects of such an approach. This applies over a range of areas from environmental impacts to the attitude of companies to minority shareholders and other corporate governance issues. In the committee's opinion, the approach adopted by Funds SA of incorporating ethical concerns into the wider range of factors considered when building investment portfolios and strategies is both sound and effective.

If this is to be considered as a serious element of the public sector superannuation industry, and the committee accepts that the public sector, in this regard, as in others, should aim to operate as a model citizen, then a more comprehensive approach than that offered by circumscribed opt-in options must be adopted.

The committee is encouraged by the evidence that these principles form part of the general matrix of risk and return factors considered by investment managers. It is only when these principles obtain an operational equivalence with the more established financial and economic indicators of performance that investment and, as consequence, corporate behaviour will change.

When these principles in the past have been seen, superficially at least, as contrary to the primary objective of the investment process—that is, maximizing returns—the integration of these principles into the investment industry enables them to have maximum effect whilst retaining fidelity to the achievement of best returns. Really, this was the tension between the so-called 'green' options or 'sustainable' options and high returns. Do you go for a green option that returns very little or nothing, or do you go for the highly profitable and, perhaps, unethical investment? This is a method of finding a way through that maze, I guess.

It is further arguable that a strategy that encourages maximal financial and ESG returns is actually adding value—and value beyond financial indicators—which was not previously achievable or even quantifiable. In an historical moment, where environmental and social priorities are imposing themselves on the economic landscape, and with the future introduction of regimes such as emissions trading, any investment process that integrates ESG into its calculations will be on surer footing as the economic terrain changes.

With respect to the operation of current ESG policies within Funds SA, the committee is of the opinion that the engagement of which Funds SA spoke should be enhanced and, in some respects, prescribed. The committee recommended to the Treasurer that:

1. Investment managers are encouraged to sign up to the United Nations Principles for Responsible Investing.

2. As an alternative, or in addition, a consistent set of ESG principles be adopted by Funds SA and prescribed as policy.

3. Funds SA requires its investment managers to exercise their votes with respect to the entities in which they invest according to ESG principles.

4. Investment managers submit voting policies and reports of their voting activities.

As a postscript, I note to the house that the Treasurer's reply to the committee indicated that, while the relevant legislation prevented him from giving direct instructions to Funds SA as to how it should manage its investment strategy, Funds SA would, nevertheless, be aware of the committee's concern.

This seems to have been the case in a curious way, since, as of this month, Super SA has begun providing a stand-alone SRI option for those customers who want to opt in. While this seems to contradict its submission to the committee, one can only assume that bringing this issue to its attention, through an agent as credible as the Economic and Finance Committee, has made it reflect on its previous attitudes.

Given the above, and pursuant to section 6 of the Parliamentary Committees Act 1991, the Economic and Finance Committee recommends that parliament note this report. In doing so, again I would like to express my thanks to all the members of the committee, in particular, Dr Lobban, who, as always, did an outstanding job in relation to the provision of support and the writing of the report that was presented to the parliament.

Mr GRIFFITHS (Goyder) (11:24): I will be brief on this. Given that I spoke in support of the motion of the member for Ashford to recommend this issue to the committee, I think it is appropriate that I make some brief comments.

I enjoyed reading the submissions received by the committee on ethical superannuation investment options. I certainly respect very much that the world has changed enormously since the motion was first put before the house. While in prosperous times it is quite reasonable for many people to make conscious decisions as to how they would like their funds invested within superannuation and to take up that option, be it in very small numbers across the board, I believe that, in terms ethical superannuation, now more people are interested in what their dollar return will be when they retire. They want to ensure that the best investment choice is made for them.

It is obvious to me that there are some difficulties attached to ensuring that a range of options is available for people to make decisions upon. I am pleased, though, that I think all members of this place would have received a letter recently as part of the superannuation membership which talks about an investment option being established which I think does define some socially responsible choices.

It shows that, while our recommendations went through to Funds SA in some way, the issue raised by the member for Ashford has indeed moved forward, and there is now some choice out there for people to make. I commend the report to the house.

Motion carried.

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