SOVEREIGN WEALTH FUNDS (SWFs) are public bodies. Government-owned and controlled entities that operate as agents of the state. As such, they fall within the ambit of state institutions bound by international human rights laws to which the state is subject.
Australia has ratified nearly all the main U.N. human rights treaties. The supervisory committees of these covenants have made clear that states’ obligations reach beyond their territorial boundaries to include commercial operations overseas (in host states), whether undertaken by the state itself through a government-owned corporation (such as the Future Fund) or by corporations resident in that state (the home state) and therefore subject to its jurisdiction.
In respect of Australia’s 2012 periodic report to the U.N. Committee on the Rights of the Child, for example, the Committee recommended that Australia:
‘...ensure the legal accountability of Australian companies and their subsidiaries regarding abuses to human rights, especially child rights, committed in the territory of the State Party or overseas and establish monitoring mechanisms, investigation and redress of such abuses, with a view to improving accountability, transparency and prevention of violations.’
As state entities, therefore, it is expected that SWFs should operate as “model investors”. That they employ international best practice standards of investment supervision, including vigilance in ensuring their investments at home and overseas do not cause, encourage or perpetuate human rights abuses.
So, the question must be asked if the Future Fund is acting as a model investor regarding its investment in Adani Ports and in its handling of risks that the investment poses.
Investing in Adani Ports
At $3.2 million, the Future Fund’s equity holding in Adani Ports is relatively small. But the size of the investment is not the point. Remember that when AUSTRAC found Westpac had facilitated off-shore payments involving the sexual exploitation of children in the Philippines, the number and size of the individual transactions were tiny when compared to the total number of money-laundering infringements. The human rights implications for the children involved, however, were profound.
The concern lies not so much in the dollar value of the Future Fund’s investment in Adani Ports, but in the process by which it saw fit to maintain its investment after the military coup in Myanmar in early February 2020 and following revelations that Adani Ports was engaged in ongoing and substantial commercial relations with the military-owned and controlled Myanmar Economic Corporation (MEC).
The MEC was established in 1997 expressly to provide funding and corporate cover for the continuation of the Tatmadaw’s political and economic control of the country. Indeed, the U.N.’s Fact-Finding Mission on Myanmar pre-coup Final Report stated that the MEC, among other military-owned enterprises, ‘allow [the Tatmadaw] to bypass civilian oversight and evade accountability’.
During questioning before recent Senate Estimates hearings (March and May 2021), Raphael Arndt, the Future Fund’s CEO, stressed how small is the Adani Ports’ holding within the Fund’s $14 billion “diversified emerging market equity exposure” before adding that in his opinion, the investment does not violate any of the Fund’s investment policies.
Exclusions, he noted, are part of these policies, including “exposures that are either illegal in Australia or breach a treaty that the Australian Government has signed” but “Adani doesn't fall into any of these categories”. Underlining his position, he made it clear that “we have no plans to divest”.
Aside from the fact that it can be argued that the Fund’s Adani Ports’ holdings could well be considered a breach of Australia’s obligations under international human rights laws, both the substance of the Future Fund’s investment policies and Dr Arndt’s understanding and interpretation of them are open to question.
Most particularly, the Future Fund makes clear in its management of Environmental, Social and Governance (ESG) issues that it focuses on:
‘...factors that have the potential to materially impact the performance of our investment portfolio and/or our reputation. Relevant ESG factors vary by industry and across asset classes but can include any of the following: occupational safety, human and labour rights, climate change, sustainable supply chain, corruption and bribery.’
Any investment, therefore – even a relatively small one – in a company that is engaged in transactions worth $290 million with an enterprise that is owned and controlled by a military that has recently staged a coup, brutally suppressed the resultant protests, killed hundreds of civilians and imprisoned thousands more, all of which has been condemned by the Australian Government, would surely trigger ESG concerns that ‘materially impact’ the investment’s performance. It beggars belief that it could fail to do so.
The Future Fund’s ESG policy also notes that when considering engagement of external investment managers, the Fund is careful to ‘consider the extent to which the manager is effectively managing the financial risks and opportunities that may arise from ESG issues’.
This last point is significant because in his evidence before Senate Estimates, Dr Arndt was at pains to point out that the Adani Ports holding was part of a passive equity strategy managed by State Street Global Advisors and that ‘we [Future Fund] do not analyse individual companies in that strategy’.
In other words, Dr Arndt is stressing that this is an “arm’s-length” investment (“passively” index tracked rather than “actively” managed) over which State Street has direct control and Future Fund only indirect control. The Fund has approached State Street, Dr Arndt informed the Committee, asking it to engage with Adani Ports regarding long-term ESG risks.
What precisely State Street has done in response to this overture and, more especially, what the Future Fund has done to pursue the matter, are still not clear (and Adani Ports maintains that it will only disengage if forced to by internationally declared sanctions). So the Adani Ports holding remains on the Future Fund’s books.
What is clear, however, is that this palming off of responsibility to State Street seems to fly in the face of the standards that the Future Fund has set itself in its investment policies. It is the Future Fund’s responsibility to monitor ‘the extent to which the manager is effectively managing financial risks and opportunities that may arise from ESG issues’.
State Street has its own ESG investment policies, as well as a Human Rights Statement which is ‘designed to prevent the illegal use of our products and services, including those that may result in human rights violations’, so one might expect State Street to reach its own conclusion to exclude Adani Ports.
But the point is that the Future Fund should not be waiting for that to happen. As an Australian tax-payers’ funded enterprise ‘responsible for investing for the benefit of future generations of Australians’, it should be taking a lead by actively disengaging from patently human rights-harming investments.
The wider context
Meanwhile, major institutional investors like KLP (Norway’s second-largest pension fund) have decided to divest from Adani Ports due to its links with the Myanmar military and responding to market demands that show a marked increase in ESG concerns among investors. Indeed, ESG factors are fast becoming critical features in investment thinking, moving from the periphery to the core of what constitutes “material risk”.
KLP is a private sector entity, yet here it is leading the way while the publicly owned Future Fund is dragging its feet. It should not be so. And not least because the Future Fund is specifically included in the Australian Government’s very own Commonwealth Modern Slavery Statement 2019-20 which commits to ‘promoting respect for human rights in its business and commercial transactions... and investments’ in line with the U.N.’s Guiding Principles on Business and Human Rights.
Australia’s Future Fund, alongside the government pension funds of Norway and New Zealand, have recently been rated as the top-performing SWFs in terms of governance and sustainability. A standout lesson from this study by SWF Global is the strong correlation between ESG performance and returns — the better the ESG oversight, the higher the returns.
The Future Fund, therefore, owes it to Australian taxpayers – if not to the people of Myanmar even more – to take responsibility and show leadership by divesting from any company that retains commercial dealings with the Myanmar military.
Professor David Kinley is Chair of Human Rights Law at University of Sydney Law School and author of Necessary Evil: How to Fix Finance by Saving Human Rights. You can follow David Kinley on Twitter @dwkinley. Read 'Community Expectations: Putting People Before Profit Means Taking Human Rights Seriously' here.
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