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Businesses for Social Responsibility - Cullen Spch

Tuesday 26 June 2001

Address to New Zealand Businesses for Social Responsibility

Sorrento in the Park, One Tree Hill Domain/Cornwall Park, Auckland

Last year, on behalf of the Prime Minister, I had the privilege of opening your August conference. It is a pleasure to be back with you today.

Annual events are an ideal opportunity for reflection on the year past.
Looking back on the Government's relationship with the business community, it's impossible not to notice the difference between then and now.

Since then, a lot has happened. We have delivered on every one of our election pledge card promises in order to help restore trust in government and to set the scene for developing our longer term vision for New Zealand.

Since then, this Government has done a lot of listening. Many have wanted to join us in dialogue and constructive debate. Through many forums and discussions with business, local government, Maori, the community sector, education and research interests, and the labour movement, we have become convinced that a shared vision for our nation is possible and that it can work to build greater prosperity and growth for us all.

Since then, we have introduced a raft of policies to help business do business better:
- Giving more teeth to the Commerce Commission
- implementing a takeovers code
- opening our doors to skilled migrants
- putting in place e-government and e-commerce strategies
- cutting compliance costs for small businesses

And of course, I have introduced my second budget with its highly focused [some might even say tight] spending priorities.

If reaction to the budget was anything to go by, my oft repeated assertion that I am a fiscal conservative was certainly proven last month - dull, but prudent seemed to be the overall consensus.

But even then, some of the more exuberant commentators went as far as to welcome the no-surprise package as heralding a period of growth for New Zealand.

That growth will come with the help of government initiatives for common sense regional development, smart innovation, and pragmatic government assistance.

For our vision is to see New Zealanders as innovators to the world - turning great ideas into great ventures.

Our goal is to lift New Zealand back into the top half of the OECD nations.
We are embarking on a long journey to reduce our reliance on commodity production, to add more knowledge and innovation to our productive base and to enhance the skills of our people.

Budget 2001 gives momentum to our programme to transform the economy by boosting funding for venture capital provision, skills training, research, business support programmes and other growth and partnership strategies.

As you are aware, the Government also used the Budget to begin making contributions into the Superannuation Fund.

The rationale behind the Fund is to save now to make it easier for future governments to meet part of the costs of state pensions as the baby boom generation retire and the number of superannuitants increase as a proportion of the population.

The initial contribution is for $600 million and this money will sit in the Debt Management Office, earning interest, earmarked for the Super Fund. But the Fund itself and the governance arrangements for it will not be formally established until the New Zealand Superannuation Bill is passed.

The Bill should now have the votes to pass after the Cabinet signed off an amendment to reflect New Zealand First's concerns relating to the conversion of the Fund to an individualised scheme.

The effect of the changes negotiated with Winston Peters are that the Guardians will have to report back within one year rather than two and that, instead of reporting on options generally, they should report specifically on the best means of allocating the Fund among individual accounts.

I have been asked to speak today about the investment component of the NZ Superannuation Fund, specifically in relation to the issue of ethical investment.

Although the term ethical investing is a fairly new to the international scene, investing in accordance with a set of values has in fact been around for some time – mainly by religious groups. But it is gaining more traction as a mainstream trend. Bearing witness to the strength of the trend is the growing number of sites on ethical investing now online.

As interest grows it seems inevitable that earmarked ethical funds will make up a larger share of the total funds available for investment. In the UK, for instance, the Labour government has changed the Pensions Act so that pension fund trustees have to declare their ethical stance.

Here in New Zealand, the concept of ethical or socially responsible investment is starting to attract more interest but to my knowledge no large scale dedicated ethical funds have yet been established. And, while the Select Committee hearing the Superannuation Bill considered a full range of views from submitters on ethical investment, those opinions came from just a handful out of about 250 submissions.

Some submitters saw ethical investment as entirely appropriate for a government run fund whereas others argued that investment rules must be purely commercially focused and not fettered by political constraints.

Let me start with the end of the argument that declares that any attempt to restrain fund managers with non-commercial – such as ethical – constraints is seen to lower the long run returns achievable. You can have ethical investment, but at a cost because it limits the full range of choices a fund manager has. The subsidiary argument is that giving fund managers dual objectives always gives them an excuse: if returns are low it was because they were pursuing ethical investments; if they invest in controversial companies it was because they were seeking better returns.

The jury is out on this. There is certainly a lot of evidence around that socially responsible funds do not produce weaker financial results than conventional ones and certainly the Commonwealth Group argues that ethical investment and prudent commercial investment are not mutually exclusive. But the counter-claim is that there has not been the time horizon or the scale of funds under management to make valid comparisons.

At the next level, the argument is that fund managers would not select investment that is not sustainable. Sustainable investment is best practice. Accordingly, socially irresponsible investment will eventually attract sanctions in one form or another: government regulation, consumer boycotts and the like.

Hence prudent fund managers would build into their calculations the risks of reducing returns from socially irresponsible entities or environmentally unsustainable projects. Whilst we may wish this to be so, it does not readily hold up as an argument given the global experience of the last two hundred years.

For even today there are profitable investment outlets, particularly short term outlets, that do generate good returns from bad labour and environmental practices.

The terms socially responsible, ethical and sustainable tend to be used interchangeably,but there are some subtle but important differences between them. There are also differences in approach to this type of investment.

Since the Superannuation Bill was introduced, a number of investment organisations have been making presentations - not just to the government - about how the ethical dimension might be incorporated into fund management decisions. There are a number of models.

The first is the prohibitionist model. Certain types of investment are simply declared to be off limits: arms manufacturers and tobacco companies are two examples. The definitions of what to include in the screening process vary widely but it is generally accepted that the common trait is the exclusion of any investments that could be seen to be supportive of human suffering or environmental destruction.

There are two problems with this model. Firstly, it only narrows the range of potential investments marginally, and could be seen to be tokenism. Secondly, the prohibited product groups can be produced by corporates with other legitimate products, and companies that profit from the products need not be the companies themselves. Banks, for example, make money from tobacco when they lend money to tobacco companies. It is very hard to fully screen a prohibition list.

The second model is the investor values model. Here the investor decides what sorts of values it wants reflected in its portfolio and the fund manager selects accordingly. That seems to be viable when the value system of the investor is tightly defined: say a religious organisation with funds to invest. It is harder to define the values of the investor when the ultimate investor is the people of New Zealand, or even the government of New Zealand. Values are diverse and at times conflicting within the body politic.

Thirdly, there is what is known as the best of sector approach. The best of sector recognises that there are sectors that will have an inherent disadvantage when it comes to some aspects of social or environmental performance. A computer software company will always generate less environmental damage that a mining or chemical company. However, a modern economy does need minerals, fuels and chemicals, so screening some sectors may be simplistic.

The best of sector ranks companies within sectors against standards of (say) social, labour and environmental performance. It then limits investment to companies in the (again, say) top thirty percent in the sector. It chooses from among those that make the grade according to conventional financial performance indicators.

The approach does limit choice to the companies that have gone through the ranking process. It is also of limited use when investments in intermediary organisations like banks are being considered.

The final model I want to talk about is the active partner model. Under this model, there are some prohibitions, but apart from that organisations that the fund invests in are encouraged to work with agents of the fund manager to improve ethical performance. That involves a mix of improving reporting on the triple bottom line: financial, social and environmental, and improving performance in each of these categories, but especially the last two.

The incentive for companies to engage with the agents is that if they do not, the fund manager will not invest in them. I am not sure that this intimate level of active engagement can be maintained with a fund of the size that the NZSF is expected to grow to, but that will be something that the Guardians will have to look at.

I don’t think that the best way forward is to select a model in advance and prescribe it in legislation. The whole field is evolving too rapidly for that.

My preference is to stay with the emphasis on process that is outlined in the Bill and which has already been through some fine tuning through the Select Committee stage.

That process operates through a number of reinforcing procedures. It starts with a high level value statement. The Guardians must invest the fund on a prudent commercial basis, but must also “avoid prejudice to New Zealand’s reputation as a responsible member of the world community”. That could imply a prohibition screen, but the Guardians do have scope to develop other methods to avoid irresponsible investing prejudicing New Zealand’s reputation.

The Guardians must then establish investment policies, standards and procedures and review them annually. These are published in a statement, and the statement has to cover a wider range of factors that include ethical investment.

This is important. There has to be an annual statement that covers all three dimensions of ethical investment: policies on ethical investment, standards on ethical investment and procedures relating to ethical investment.

Each year, the Guardians must publish a report that includes a statement certifying whether or not the investment policies, standards and procedures have been complied with.

There is adequate scope for Parliamentary and public scrutiny of whether the policies on ethical – and of course other dimensions of – investment are appropriate, whether standards are adequate, and whether standards have been met.

To round things out, at least every five years there has to be an independent review of how efficiently and effectively the Guardians are performing their functions. That includes whether the policies et al on ethical investment are appropriate and whether they have been complied with.

I believe this package is sufficiently specific, sufficiently flexible, sufficiently transparent yet sufficiently accountable to allow us to move forward with some confidence on this new investment frontier without compromising the financial imperatives of the fund.

I look forward to hearing your views on this issue.


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