A responsible mandate for the Future Fund

With the Future Fund well on its way to becoming a reality, the Treasurer and Minister of Finance will soon have the responsibility of developing an investment mandate for one of the largest institutional investors in Australia.

I am a former employee of the Commonwealth . The Future Fund was set up to finance the Commonwealth’s unfunded superannuation liabilities to people like me. Since I am therefore at least a notional beneficiary of the Fund, here are some of my thoughts and aspirations as I look forward to my retirement in 25 years’ time.

First of all, I would like to be financially comfortable and secure. The long-term financial focus of the Future Fund is thus reassuring, and I have little doubt that the investment mandate will reflect that objective.

But my goals are not merely or even primarily financial. When I retire, I would like to spend my days travelling and enjoying the wonders of this sunburnt country, my adopted home.

I look forward to wandering through the mists of the ancient Tasmanian forests, paying my respects to the traditional owners of Australia from atop Nawurlandja in Kakadu, and contemplating the spectacular biodiversity of the Daintree and the Great Barrier Reef. But money in the bank won’t help me do these things if uncontrolled climate change wrecks these Australian icons.

I also want to retire in an Australia that is just and fair, where people and communities are healthy, our cultural life is vibrant and diverse, and where we live in harmony with neighbouring countries that themselves have sustainable and healthy environments and communities.

I believe that most Australians share these aspirations for their futures as well. The way in which the Future Fund’s assets are invested could be a powerful force to advance these, our common goals, or it could undermine them.

In short, the Future Fund should not be just another mainstream investor, chasing short-term profits while disregarding our long-term collective wellbeing. Instead, it should be an absolute world leader in responsible investment practice and responsible share ownership.

That is much easier said than done, but the following five principles are at least a starting point.

1. Internal and external fund managers must be rewarded for long-term performance, not short-term volatility. This means their compensation should be based on 3- to 10-year rolling performance periods, rather than quarterly or annual hurdles.
2. The Future Fund should engage with the companies in which it invests to ensure long-term environmental and social excellence. This means regular meetings, tough questions on sustainability issues, expectations of continual improvement and, where necessary, sponsoring shareholder resolutions to compel responsible behaviour.
3. Where external fund managers are used, they should be required to demonstrate to the Future Fund how they are proactively managing long-term sustainability issues.
4. Companies that engage in fundamentally unsound environmental practices, human rights abuses, or other activities that are incompatible with our wellbeing as a society should be out of bounds.
5. A portion of the fund’s assets in every class should be invested in specifically sustainability-oriented funds.

These principles are not incompatible with sound profits, and many forward-thinking investors are already following some or all of them without sacrificing returns. For example, Portfolio Partners has implemented the first principle for some of its funds while BT’s Governance Advisory Service is a good working example of the second. VicSuper has implemented the fifth by dedicating 10% of its equities and property portfolios to specific sustainability investments.

Sustainable investment is no longer the exclusive province of small, specialist funds. The multi-billion dollar pension funds of several U.S. states including California and Connecticut are leaders in shareholder activism, while the AU$350 billion Norwegian Pension Fund (one of the world’s largest investors) has a detailed set of ethical guidelines intended to “generate a sound return in the long term, which is contingent on sustainable development in the economic, environmental and social sense.”

We deserve the same. I urge the responsible Ministers and the Future Fund Board of Guardians to ensure that the Future Fund utilises its market power to enhance our real long-term wellbeing.

The Australian government continually, and rightly, encourages private businesses to act and invest responsibly. Now is the time to walk the talk.