Senator Barbara Pocock – Estimates questions relating to whether the Future Fund holds investments in companies that produce and sell armaments to Israel

February 13, 2024

Do you know whether the fund holds any investments in companies that produce and sell armaments to the State of Israel?

Senator BARBARA POCOCK: Thanks for being here. In October 2023, the new portfolio holdings disclosure rules for the Future Fund board took effect, as I understand it, requiring more detailed biannual reports on the Future Fund’s investments. The first report under this new set of rules detailing the portfolio as it existed on 31 December 2023 is due by the end of March. Is that right?

Dr Arndt : Yes, it’s around the end of March.

Senator BARBARA POCOCK: Can you give us an update on the progress of that first report? We’re just six weeks off.

Dr Arndt : Yes, we’re working on that right now. It’s a little complex because we have many tens of thousands of assets and we have to make sure our systems produce the information in the format required, but we’re confident that we’ll be able to meet that time line.

Senator BARBARA POCOCK: Great. As you know, I’m very keen to see the Future Fund become more transparent to the Australian people, and I’m far from alone in that view. I ask a lot of questions about the fund’s holdings, and I’ve submitted a number of questions on notice this session. In the past I’ve been critical of the fund’s existing reporting responsibilities—in particular the limitations of the 100 largest equity holdings data that’s released each year. Will this new six-monthly report make the fund more transparent, particularly in relation to some of those environment, social and governance pillars that a lot of investment houses pay attention to? These are concerns that are very widespread, and I’ve certainly raised them in the past myself—things like climate risk and the harms associated with problem gambling.

Dr Arndt : I think we’ve always been transparent. As you know, we answer questions on notice from senators. We appear here at least three times a year, and we answer freedom of information requests about the portfolio. But the portfolio holdings disclosure sets up a framework for that, and we’ll do that regularly. Hopefully, people who are interested in our portfolio will be able to go to that source of information, which will avoid the ad hoc requests and work associated with that. So we’re looking forward to that.

Senator BARBARA POCOCK: So it would be systemic and regular, without having to request all of those pieces of machinery to chase it down?

Dr Arndt : Exactly.

Senator BARBARA POCOCK: And you expect to provide a historical context each year? Is it an annual report you expect to make?

Dr Arndt : The portfolio holdings disclosure is biannual.

Senator BARBARA POCOCK: Okay. I’ve put in questions on notice, on which I understand I’ll receive written responses. But I want to ask: how is the Future Fund responding to some of those very serious ESG—environment, social and governance—considerations in the way that it manages the portfolio? How are you responding at the present time?

Dr Arndt : The board’s ESG policy is on our website, and we report on our approach in the annual report. We’ve discussed here quite a few times about how we think about climate risks and carbon transition in the portfolio, both as a risk and as an opportunity. We exercise our governance rights in proxy voting, and we report every vote that we make in Australia on that, along with our voting principles. As we’ve discussed, the board applies, to a limited extent, exclusions from the portfolio. We’ve explained that approach previously, and that hasn’t changed.

Senator BARBARA POCOCK: So how is that stance, that set of principles, affecting, for example, the rate of decarbonisation in the Future Fund portfolio?

Dr Arndt : Do you want to talk to that?

Mr Samild : Yes, I can speak to that. As I was outlining before, this thematic of climate in particular and ESG more broadly is a very significant one. It’s one of the largest capital events in human history. We take it extremely seriously, and we build it into those foundational scenarios right at the start of our investment process. We then take notice of it throughout all of our diligence, both at the total portfolio and at the individual asset level. It’s formally part of our diligence documents and our assessment of that. We have an ESG team that provides inputs at the total portfolio level, at the individual asset level and at the opportunity level and is also responsible for our voting and our engagement strategy.

Senator BARBARA POCOCK: Thank you. What you’ve described is a process. You haven’t answered my question, which is: how has the structure of the investments changed as a consequence of those processes? How has the profile of the carbon burden of your investments shifted?

Dr Arndt : I might have a go at that one.

Senator BARBARA POCOCK: Great.

Dr Arndt : The exposure that we have to fossil fuels and carbon exposed businesses is changing as economies around the world change. Economies are decarbonising. We also apply lenses at the whole-of-portfolio level to think about our overall exposure, and we’ve talked here in previous years about some scenario modelling that we did on the portfolio. The way we invest has always meant that we have a lower carbon intensity in the portfolio than the index as a whole because we have a relatively low weight to equities and because the most carbon intensive businesses in economies tend to be listed, particularly in emerging markets, or power utilities. So we tend to have a fairly low exposure to that, and when we’ve looked at that relative to other long-term investors, we tend to have a lower exposure. We’re working towards more comprehensive reporting on this issue, in line with the government’s policy. At the moment we’re working through exactly what that reporting will look like, but in due course we’ll make that available.

Senator BARBARA POCOCK: Do you anticipate in the report that you’re making in late March that you will reveal detail about that low comparative exposure relative to other indexes? In that report are you going to give us an indication of what you’ve just said?

Dr Arndt : In that report we’ll be disclosing every equity position in the fund and, in fact, across all the funds. As I said, that’s where the biggest exposures lie. In terms of the overall reporting, we’re still working out those details, in line with the public sector in general. That’s the work that the department is doing. We’re working towards that disclosure soon, but it won’t be in March.

Senator BARBARA POCOCK: You’ve just described that, given the nature of your investments, you have a low carbon exposure relative to those indexes. Could you give us, on notice, the evidence of that?

Dr Arndt : Yes.

Senator BARBARA POCOCK: Similarly, in relation to gambling, what’s the trend? What’s the shift in your structure of investments and the composition of them in relation to gambling?

Dr Arndt : It’s a pretty low exposure. I think you’ve asked some questions previously about the exposure.

Senator BARBARA POCOCK: I have.

Dr Arndt : The largest holdings have been through the Australian listed market, and, of course, the biggest one, Crown, has been delisted, so that has disappeared out of the portfolio.

Senator BARBARA POCOCK: It was Crown?

Dr Arndt : Crown. I’m confident that the exposure would have reduced over time, but we haven’t tracked the specific exposure to gambling.

Senator BARBARA POCOCK: You haven’t tracked it.

Dr Arndt : No.

Senator BARBARA POCOCK: Could you do that? Would you be able to provide on notice some evidence of how that is tracking, and the composition, say over the last five years?

Dr Arndt : We can look at that.

Senator BARBARA POCOCK: Similarly, given that alcohol has been in the public debate rather energetically in the last week, what about your profile in relation to alcohol?

Dr Arndt : It’s the same as gambling. It’s not something that we specifically track.

Senator BARBARA POCOCK: But would you be able to give an indication on notice of how your investments in alcohol are tracking?

Dr Arndt : We can look at that.

Senator BARBARA POCOCK: Thank you. Minister, I’ve asked you this before. Do you remain comfortable with the level of investment in gambling and in alcohol? I haven’t asked you about the alcohol before.

Senator Gallagher: No. You’ve added the alcohol in.

Senator BARBARA POCOCK: It’s a good week to ask you though.

Senator Gallagher: I’m comfortable with the settings that we have for the Future Fund and the disclosure arrangements and having a fund that balances up those responsibilities with making a return and being a very successful fund to fund ongoing liabilities for the government. It is a balancing act, but they’ve got a job to do as well.

Senator BARBARA POCOCK: Do you anticipate a decline in the level of investment within the fund’s total package of investments in alcohol and gambling?

Senator Gallagher: That’s a matter for the fund—for the agency, which adheres to the mandate set by the government. We don’t tell them—

Senator BARBARA POCOCK: Well, you have told them in relation to tobacco, and they have shifted, and the social cost has affected—

Senator Gallagher: Yes. We haven’t in relation to those other issues you’ve raised.

Dr Arndt : Just to clarify, the decision to exclude tobacco products from the fund was the board’s decision. It wasn’t an instruction from the government—

Senator BARBARA POCOCK: Has the board—

Dr Arndt : I think it was in approximately 2014—2013; I’ve been corrected.

Senator BARBARA POCOCK: Has the board had any discussion about taking the same road in relation to alcohol or in relation to gambling?

Dr Arndt : The board reviews their exclusions policy periodically and, as a general rule, the board has believed that limiting the investment universe isn’t consistent with the mandate to maximise return. It removes levers for the fund managers to actively trade between stocks. However, as I’ve explained before, in limited circumstances the board has decided to exclude certain classes of investment from the portfolio, being controversial weapons and whole tobacco product manufacturing. At the time the board made that decision they explained that they’d made the decision around tobacco because there was no safe use of the product.

Senator BARBARA POCOCK: Going to the question of armaments, you mentioned controversial weapons. How do you define those?

Dr Arndt : It’s the manufacture of weapons that would breach a treaty the Australian government has ratified—that is, cluster munitions, landmines, nuclear weapons in countries that haven’t signed the nonproliferation treaty and biological or chemical weapons.

Senator BARBARA POCOCK: What is the profile and the direction of change in that area of non-controversial weapons investments in the funds you manage?

Dr Arndt : I would have to take that on notice.

Senator BARBARA POCOCK: Could you? Thank you. Do you know whether the fund holds any investments in companies that produce and sell armaments to the State of Israel?

Dr Arndt : That’s not something we track in terms of which companies sell to which governments.

Senator BARBARA POCOCK: Could you take on notice to give us advice as to whether you have any knowledge of that?

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