Feature
A Good Return
by Matt Nippert
Government agencies investing more than $27 billion of public money are required to “avoid prejudice to New Zealand’s reputation as a responsible member of the world community”. How are they doing?
What do Tornado warplanes, a Saudi prince, billions of dollars in secretive “support service” payments and your retirement savings have in common? The answer is British arms firm BAE Systems, the subject of explosive BBC and Guardian reports alleging that over the past two decades up to $400 million a year was siphoned to Saudi royal Bandar bin Sultan as part of armaments contracts.
As disclosed earlier this year in the Listener (“Dirty dollars”, February 17) the New Zealand Superannuation Fund (NZSF) holds a $2 million stake in BAE, a company also blacklisted by the Norwegian Government’s pension fund because of its involvement in nuclear weapons production.
After further investigation under the Official Information Act, we can now reveal that collectively the three largest Crown Financial Institutions (CFIs) – NZSF, the Earthquake Commission (EQC) and the Accident Compensation Corporation (ACC) – hold a combined stake of nearly $14 million in the controversial weapons manufacturer.
Government agencies, despite red flags being raised, aren’t talking of divestment from BAE. The head of responsible investment at NZSF, Anne-Maree O’Connor, is well aware of recent developments.
“As you can imagine, one of our advisers has highlighted this as a stock that potentially breaches the UN Global Compact,” she says in reference to an international protocol – to which the NZSF is party – that condemns bribery, corruption and other corporate misbehaviour.
Citing an ongoing internal BAE inquiry and a possible investigation by the US Department of Justice, O’Connor says several questions need to be answered before NZSF considers divestment.
“Are they going to be proven?” she asks. “Is it historic? Is the company becoming a leader in trying to address these issues?”
Together, NZSF, ACC and EQC oversee more than $27 billion of public money, and all are governed by a requirement to “avoid prejudice to New Zealand’s reputation as a responsible member of the world community”. The application of this principle, however, is anything but uniform. EQC and NZSF between them have invested almost $35 million of taxpayers’ money in tobacco companies, including those that dominate the New Zealand market, and who are growing the business of smoking in the developing world. Last year, however, ACC decided to blacklist the entire cigarette industry on ethical grounds.
Ben Youden, the newly appointed head of anti-smoking group Action on Smoking and Health, says he’s thrilled with ACC but perplexed at why the other CFIs haven’t followed suit. “I’m amazed that when these investment funds were set up they weren’t told what they should and shouldn’t invest in,” he says.
Legality is generally the CFI’s golden rule and is best summed up by O’Connor: “If the product or service is allowed under New Zealand law, that’s taken as the basis as to what would be acceptable to the New Zealand population.”
But ACC has taken a decidedly more moralistic interpretation of the law, saying in its statement of intent that its objective is “not merely to avoid prejudice to New Zealand’s international reputation. We aim to act in an ethical manner and to invest in ethically acceptable activities as an objective in its own right.”
In a letter signed in August 2006 by then-ACC board chairman David Collins QC, the question of whether legality was the absolute arbiter in being a responsible investor was answered in the negative: “Tobacco companies do operate legally in New Zealand, although legislative changes have progressively restricted the sale and consumption of tobacco. We have interpreted these changes as reflecting the practical difficulties of prohibition rather than a perception that smoking is an acceptable activity.”
Going further, Collins wrote, “It can be argued that most tobacco buyers are compelled to enter into transactions because of addiction rather than of their own free will. Hence we concluded it was appropriate for ACC to exclude investments in tobacco companies, notwithstanding the effect that this may at times have a small adverse impact on investment returns.”
(Ian Simpson, general manager of finance for ACC, says that, one year on, the ban “has not had a major impact on ACC’s investment portfolio”.)
ACC also considers more than just the letter of the law. Its broker suggested purchasing shares in an Australian company, Silex. However, after investigation the transaction was terminated because: “The company was involved in developing technology for uranium enrichment and [that] would be inconsistent with ACC’s policy of not investing in companies that engage in activities that are contrary to the spirit of New Zealand law (specifically New Zealand’s nuclear-free legislation).”
While ACC is debating the underlying meaning of the law, other CFIs are still busy formulating a responsible investing policy – a process that began six years ago. The Earthquake Commission still has some way to go, according to documents provided under the Official Information Act: “We expect to formalise EQC practice and thinking into a formal document later this year.”
Prime Minister Helen Clark has said, “I find investment in tobacco companies extremely offensive.”
And the bodies that invest public money are on notice. After the Listener article in February, Finance Minister Michael Cullen wrote to all CFIs ordering a review of their responsible investment policies. “It remains the decision of the boards as to how their requirements should be interpreted and which stocks they invest in.”
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