The politics of institutional investment is highly contested, with the Coalition’s establishment of the Future Fund and Labor’s landmark introduction of compulsory super perennial flash-points.
But there is one area where there is seemingly bipartisan agreement: pools of institutional capital are an attractive off-budget solution to big social and economic problems for governments.
Treasurer Jim Chalmers and Finance Minister Katy Gallagher on Thursday announced the first changes to the sovereign wealth fund’s investment mandate in more than a decade. The Future Fund will now be required to “consider Australia’s national priorities in its investment decisions”. Going further, the government helpfully stipulates what it believes those priorities to be, singling out increasing supply of residential housing, supporting the energy transition and improving infrastructure.
Given the well-documented housing crisis and evidence of climate change, some will welcome the change as overdue. For example, the Greens – who have long called for the fund to be legally prevented from investing in fossil fuels and celebrated the decision as being in line with the wishes of the “overwhelming majority” of Australians.
And some believe the sovereign fund had a decidedly anti-ESG stance under its founder and previous chair, former Liberal treasurer Peter Costello – and that therefore this new mandate seemingly brings the fund more in line with the industry’s mainstream.
But nonetheless there is clearly a partisan political motivation here for the Albanese government, which has painted an image of Australia as a “green superpower” as a central plank of its bid for re-election.
And moreover, the principle at stake here should worry anyone who believes in the independence and sovereignty of decision-making at the heart of the fiduciary duty institutional investors have to members or taxpayers.
The mandate goes well beyond the government’s unsubtle but hitherto unforced encouragement of investors to embrace net zero or the economies of our Pacific neighbours, for example. It is now in the realm of full-blown political interference.
So-called “national priorities” are inherently subjective and controversial, and increasingly so in such a polarised political environment. If the flow of institutional capital to green causes can be mandated by one government, then another stripe could very easily deploy the same mechanism to support the traditional mining industry or prop up brown assets, for example.
That is why the feverish response to the Future Fund mandate from the federal Coalition and Murdoch press also warrants scrutiny. Shadow Treasurer Angus Taylor came out swinging that his counterpart was “raiding Australia’s nest egg to cover for its economic failures”. Writing in The Australian, commentator Judith Sloan pronounced the “end of the Future Fund”.
But, of course, the conservative side of politics also has a track record of intervention. Its Your Future Your Super reforms – thrust upon the industry without consultation during the pandemic – introduced a highly contentious performance test that arguably incentivises index-hugging rather than allowing CIOs and their teams the freedom to make decisions in line with their fiduciary obligations.
The legislation, as intended, would have gone even further, providing then-treasurer Josh Frydenberg effectively with a veto over the investment decisions of super funds. Mercifully, the Morrison government dumped this element following backlash from within its own ranks.
And the phenomenon is by no means confined to Australia. As Investment Magazine reported last week, the left-leaning and newly elected Labour government in the UK has proposed widespread reforms to the pension system to make it more like Australia’s. Chancellor Rachel Reeves said the reforms are partly motivated by encouraging more institutional capital flow to the British economy, especially private equity and start-ups.
And in Canada – often praised as the poster child for global investment governance – the right-wing government in Alberta has embarked on a similarly parochial project, with premier Danielle Smith urging the Alberta Investment Management Corporation (AIMCo) to invest more in the province.
Spectacularly, the row led to the CEO and entire board of AIMCo being sacked last month – a board that University of Toronto academic and global investment industry luminary Keith Ambachtsheer told Investment Magazine sister publication Top1000Funds.com should be considered “high quality”.
In just the past few hours, the Alberta government has appointed former conservative Canadian prime minister Stephen Harper as AIMCo chair in a move that will do little to calm the nerves of those who oppose the increasing politicisation of professional fiduciary investments.
The Australian government’s appointment of former Labor minister and trade union boss Greg Combet to replace Costello as Future Fund chair may also have been an attempt to smooth its coming mandate change.
Indeed, Combet on Wednesday said he “appreciates the strong support” of the government and thanked it for its decision to defer drawdowns from the Future Fund until at least 2032-33.
Combet tried to play down the significance of the mandate amendment, explaining that the fund has $12 billion – more than half of its infrastructure portfolio – worth of direct holdings in “businesses that play an important role in the lives of Australians”, including renewable energy projects.
If that is the case, then self-evidently an explicit mandate from the government is not necessary.
But more importantly, it is not right.
Those tasked with governance of asset owners should be more willing to challenge political intervention in their investment strategy, regardless of whether they agree with the mandate in question or the sweeteners that may be attached.
Their very independence as fiduciaries is at stake.
