The Future Fund has previously been criticised for its investment in the Adani Group subsidiary Adani Ports, when in December it was revealed the fund held $3.2 million worth in equity holdings.
Appearing before Senate estimates, Future Fund chief executive Raphael Arndt revealed Future Fund’s holding is part of a passive equity strategy, managed by State Street Global Advisors, that tracks an MSCI index.
The fund had acquired the holding around 2011, as part of an effort to diversify into emerging markets equities.
Human rights and climate advocacy groups have raised concerns around Adani Ports’ business relationship with the Myanmar military as well as its ownership of Bowen Rail Company, the company managing the transport of coal from Adani’s Carmichael mine in Queensland.
Greens senator Nick McKim raised the same concerns, also pointing to the recent Myanmar military coup.
But as argued by Dr Arndt, the Adani Ports holding is a ripple in the ocean of money managed by the Future Fund and it has not violated any of its investment policy. The exact composition of the equity market index that the fund is using is a matter for the research provider, the CEO said.
“It’s one holding, about $3 million in a $12 billion strategy, so it’s a relatively small holding,” he told Senate estimates.
“We have a fairly well defined exclusions policy, which… is limited to exposures that are either illegal in Australia or breach a treaty that the Australian government has signed, or hold tobacco product manufacturing.
“In this particular case, Adani doesn’t fall into any of those categories. So we have no plans to divest.”
Senator McKim noted other companies such as Swiss Re and PIMCO have pulled away from Adani – asking what the Future Fund’s policy was around fossil fuels.
Dr Arndt confirmed the Future Fund tracks movements around energy in the investment industry, but it does not believe excluding fossil fuels “because they are fossil fuels” would be consistent with its mandate, to maximise returns over the long run without taking excessive risk.
“But the Future Fund’s decision not to invest in tobacco, was that a decision made on economic risk? Or was that made on the grounds that tobacco companies basically profit from killing people?” Senator McKim challenged.
“The board’s discussion at the time, was that because there was no such use for tobacco-” Dr Arndt started.
“-No substitutes?” Senator McKim interjected.
“No safe use. That it was a special case and should be excluded from the portfolio,” Dr Arndt clarified.
“And would the board argue that there is a safe use for fossil fuels?” the senator asked.
“We haven’t had that conversation,” Dr Ardnt said, later adding that the board attempts to consider the long-term risks and returns from its investments and ensure it stays consistent with the mandate. Further, it has tried to “balance the portfolio” with renewables.
“I guess I’m just struggling to understand why the board would decide they’re not going to invest in tobacco because there’s no safe use, but continue to support investment in fossil fuels, which I would argue there is no safe use for fossil fuels because it’s cooking the planet,” Senator McKim stated.
But while the Future Fund is more concerned with whole-of-portfolio exposure, rather than individual companies, it does engage with certain groups to determine its risk.
The fund does consider ESG factors, which Dr Ardt commented are tailored for the strategy at hand. The Future Fund has approached State Street on Adani Ports, having asked the investment manager to engage with the company on long-term ESG risks.
“I wasn’t in that particular meeting, but I believe we raised the issues with them and asked them to consider that as part of their process,” Dr Ardnt said.
“Okay, I’m sorry and when you say you raised the issues, what are you referring to there?” Senator McKim asked.
“So we pointed out to them, this my understanding, because I wasn’t in the meeting – but we pointed out to them the broad range of activities of this particular company and our ESG principles, which are public, and asked them to make sure they’re taking them into account.”
But Dr Ardnt rejected that State Street had not considered Future Fund’s ESG principles, commenting the company does “continue to do a good job for the mandate we’ve given”.
