Not quite so super

Earlier this year, the superannuation (pension) fund Australian Super, which invests $30 billion on behalf of 1.4 million working Australians removed its ethical exclusion policy (PDF 191KB).

As a result, the Fund no longer excludes investments companies which derive 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”.

Although the ethical policy has been replaced with a “best-of-sector approach” where no companies are excluded for failing to meet ethical criteria, it is possible that the move will result in Australia’s largest superannuation fund investing in firms involved in the development, production, and trade of cluster munitions and other armaments.

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 from August 2010 have been banned under international law - could find their way into the fund’s investments.

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 judgment on matters it once made clear to them in public. Australian Super claims that it will nevertheless “remain socially responsible”.

A review of the publicly-available information on Australian Super’s funds indicates that the Fund has selected a number of investment managers and service providers that are known to have some commercial involvement in the armaments industry. The following investment managers hired by Australian Super are known to have invested directly in corporations involved in the production of cluster munitions:

• Acadian Asset Management (US): Poongsan Corp (South Korea);
• LSV Capital Management (US): Textron Inc (US);
• T. Rowe Price Group (US): Alliant Techsystems Inc (US), Lockheed-Martin (US);
• Vanguard (US): Textron Inc (US), Poongsan Corp (South Korea), Singapore Technologies Engineering (Singapore), Alliant Techsystems Inc (US), L-3 Communications Holding Inc (US), Hanwha Corp (South Korea);
• Blackrock (US): Singapore Technologies Engineering (Singapore), L-3 Communications, Textron Inc (US), Hanwha Corp (South Korea), Alliant Techsystems Inc (US), Lockheed-Martin (US);
• State Street (US): Textron Inc (US), Poongsan Corp (South Korea), Singapore Technologies Engineering (Singapore), Alliant Techsystems Inc (US), and L-3 Communications Holdings Inc (US); and
• Credit Suisse (Switzerland): Singapore Technologies Engineering (Singapore), Alliant Techsystems Inc (US)

In addition, the following investment managers hired by Australian Super are known to have provided loans and investment banking services to armaments manufacturers involved in the production of cluster munitions:

• State Street (US): Lockheed-Martin (US);
• Morgan Stanley (US): Textron Inc (US), Lockheed-Martin (US), Singapore Technologies Engineering (Singapore); and
• Credit Suisse (Switzerland): Textron Inc (US).

It remains unknown, however, whether Australian Super selects products or constructs mandates that ask these managers to exclude investments in cluster munitions.

What we do know is that Australian super funds are not adopting international best practice. For example, Health Super, a $7 billion superannuation (pension) fund servicing Australian health professionals currently had four of its nine investment options are labelled “socially responsible”. Put another way, $95 million, or 1.2 per cent, of the fund is invested “socially responsibly”.

Investments in the socially responsible options exclude companies that are “materially involved in certain negative activities” which includes the following: alcohol, tobacco, pornography, gambling, armaments, the defence industry, uranium and nuclear power, damaging the environment, child labour, oppressive regimes, fur, and animal testing. Companies excluded are said to derive more than 10 per cent of their revenues (or by other “key financial measures”) from one or more of the negative activities outlined by Health Super.

This is also a practice adopted for some government-controlled funds.

Since it was formed in 2006, the $65 billion Australian Future Fund has not made any public statements regarding the ethical position with which it invests, nor the specific nature of its investments, except for a brief statement (PDF 168KB) regarding how it might choose to direct its service providers to vote at shareholder meetings and on proxies.

What we do know is that the Future Fund have selected a number of investment managers and service providers that are known to have some commercial involvement in the armaments industry.

The following investment managers hired by the Future Fund are known to have invested directly in corporations involved in the production of cluster munitions:

• State Street (US): Textron Inc (US), Poongsan Corp (South Korea), Singapore Technologies Engineering (Singapore), Alliant Techsystems Inc (US), and L-3 Communications Holdings Inc (US);
• Vanguard (US): Textron Inc (US), Poongsan Corp (South Korea), Singapore Technologies Engineering (Singapore), Alliant Techsystems Inc (US), L-3 Communications Holding Inc (US), Hanwha Corp (South Korea);
• Goldman Sachs (US): Alliant Techsystems Inc (US); and
• Blackrock (US): Singapore Technologies Engineering (Singapore), L-3 Communications, Textron Inc (US), Hanwha Corp (South Korea), Alliant Techsystems Inc (US), Lockheed-Martin (US).

In addition, the following investment managers hired by the Future Fund are known to have provided loans and investment banking services to armaments manufacturers involved in the production of cluster munitions:

• State Street (US): Lockheed-Martin (US);
• Goldman Sachs (US): Alliant Techsystems Inc (US), Textron Inc (US), Lockheed-Martin (US); and
• Canyon Capital Advisers (US): Alliant Techsystems Inc (US).

It remains unknown, however, whether the Future Fund select products or construct mandates which ask these managers to exclude investments in cluster munitions. What we do know is that the Australian Government has signed but not ratified the Cluster Munitions Convention (2008).

None of this is international best practice.

For example, the $500 billion Norwegian Government Pension Fund, as well as a clearly defined ethical exclusion policy and the public disclosure of all Ethical Committee rulings, a review of the Fund’s website indicates that the following companies are excluded for their involvement in cluster munitions:

• Alliant Techsystems Inc. (US) on 30 June 2005;
• General Dynamic Corporation (US) on 30 June 2005;
• Hanwha Corporation (South Korea) on 15 May 2007;
• L-3 Communications Holdings Inc. (US) on 30 June 2005;
• Lockheed Martin Corporation (US) on 30 June 2005;
• Poongsan Corporation (South Korea) on 30 September 2005;
• Raytheon Company (US) on 30 June 2005; and
• Textron Inc. (US) on 30 June 2009.

Having formed the Ethical Council in 2004, the Fund has lifted a number of its exclusions - based on revised recommendations, fresh evidence or a change in company behaviour. Despite considerable criticism by myopic investment professionals for divesting in companies on purely ethical grounds - for both contravening investment theory and removing the ability of engaging in the company and changing behaviour - the Norwegian Fund is widely regarded as having one of the most transparent ethical exclusion mechanisms anywhere in the world.

When are Australian’s going to be afforded the same?