Address to the UNEP Responsible Investment Conf.
Opening Address to the United Nations Environment Programme
Socially Responsible Investment Conference 2002
Hon Dr Michael Cullen, Minister of Finance
Tuesday 21 May 2002
Stamford Plaza Hotel, Auckland
It is a pleasure for me to open this conference on Socially Responsible Investment.
I am sure that no investor or investment advisor would be happy for their practices to be described as socially irresponsible. And yet – as the international debate around the Kyoto Protocol demonstrates – one of the greatest challenges to the current generation of leaders is how to overcome the blindness – which is seemingly endemic in some quarters – to the negative consequences of certain types of resource-use and certain types of business practices.
Socially responsible investment is definitely an idea whose time has come; but, as the philosopher John Locke once said, “Truth scarce ever yet carried it by vote anywhere at its first appearance”. For that reason it is an idea which needs to be thoroughly debated and studied, so that it is equipped with sophisticated analysis of the kind that institutional investors require to guide their actions. I trust that today’s conference will be a valuable contribution to that ongoing process.
It is not my intention today to contribute to the philosophical debate, except to say that we need to find ways within our broader concept of accounting to avoid rewarding those who apply a high discount rate to future benefits and future costs. The playing field is still tilted; it allows the drawing down of assets for current consumption that cannot easily be replaced, and that are in some instances irreplaceable.
I am talking in the first instance of environmental assets, including the global climatic system whose self-regulating abilities we have relied upon. Actions which endanger this by using the atmosphere as a free garbage dump are usually accounted for as revenue; while actions which limit such damage or even reverse it appear in our books as a cost.
It is partly with this in mind that the government is pursuing an economic strategy aimed at transforming our economy towards increasing productivity and value added, rather than increasing volumes. We know we can never beat the rest of the world simply on supplying commodity volume. That is why we are investing in ways of reducing our dependence upon commodity cycles, in particular by government-business partnerships aimed at fostering innovation in the areas of biotechnology, information and communications technology and the creative industries.
We see these as competencies which have broad applications across the economy; not as industry silos. And importantly we see them as ways of improving the ratio between the value that is created for human enjoyment and the use of natural resources, both tangible and intangible.
There is potential here for a win-win situation. We are putting money into finding clever ways of doing more with less. Into seeking to develop and use technologies which allow the same or increased financial gains to flow from less extractive or potentially polluting activity. In other words, a New Zealand economy of the future which is based more upon high-value, high-skill businesses will rest more lightly upon the natural environment than our current economy.
I would also want to extend the point about developing a better relationship with environmental assets to cover social capital as well. This is often as hard to define and measure as environmental values, but no less important.
It is interesting to note how the language of socially responsible investment echoes that of the social democratic tradition in politics. Triple bottom lines and balanced scorecards are conceptually very close to the conviction that the purpose of government is to foster growth that is measured in terms not only of gross domestic product or even its distribution within the community, but also in terms of community development and cohesion, the protection of the natural environment, and the promotion of the institutions of democracy and civil society as ends in themselves.
This broader notion of growth is something that the current government is attempting to apply in its policies. As you might expect, it is not a simple set of equations. There are trade offs to be made, sometimes difficult, sometimes agonising and sometimes – and these are the most troublesome – trade offs that are vulnerable to simplistic political attack.
For example, we face difficult trade offs with the process for ratification of the Kyoto Protocol. Imperfect though it is, it is the best international agreement we have, and the government is committed to being on the side of the angels, but the pragmatic angels. Given the likely disastrous impact of climate change on our land-based industries, getting a critical mass of nation states behind the Protocol is a matter of long term economic security for New Zealand. Yet in the short term there is uncertainty and risk; and this at a time when we need to shift our economic performance up a gear.
We have a preferred policy package which includes measures to assist key affected industries; but there is no escaping the fact that the Kyoto Protocol requires a major mind shift in the way we consume and the way we do business.
We are facing agonising trade offs when considering the health budget, in which matters of immediate life and death vie for resources with longer term, less visible issues, which nevertheless exert a more significant influence on the health status of the population as a whole. We have an expectation on the one hand that the latest – and most expensive – surgical and pharmaceutical therapies will be available to us when we need them. And on the other, the overwhelming evidence is that it is good primary health care and beyond that, issues such as adequate housing for low-income people, that have the greatest long term impact upon the health of us all.
Finally we are facing the third type of trade off with our commitment to set aside a portion of current and future fiscal surpluses in order to pre-fund some of the future cost of state pensions for our ageing baby-boom generation. The logic of the policy is clear; but the very sight of money set aside to meet future obligations – and being used in part to invest in New Zealand’s economy – leads some to propose that the money be diverted into current consumption in the form of unsustainable spending promises or unsustainable tax cuts that will simply create problems for the government’s future fiscal situation or its balance sheet. In this kind of situation, reasoned analysis always has to battle uphill against the 30-second sound-bite. The propagandist’s motto is turned on its head: truth has to be repeated many times just to be accepted for what it is.
Assuming that the Superannuation Fund survives – and that will depend upon events to take place later this year – it will play an important role in influencing the New Zealand investment markets. Will it, then, be a fund which explicitly adopts socially responsible investment guidelines and practices? The answer to that question is unequivocally yes.
What I have made clear, however, is that the government’s role in establishing the Fund and administering its constitutional mandate will not extend to requiring that a particular model of socially responsible investment be adopted. The primary purpose of the fund is financial. Ethical investment is a dimension of its activity; not the dominant purpose.
Instead, the legislation outlines a number of processes which will require the Guardians of the Fund to adopt policies which demonstrably balance commercial, social and environmental responsibility.
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. This provides scope for the latest research on SRI and the alternative models which can be accommodated under its umbrella to be incorporated into the Fund’s policies. Indeed, the Guardians are responsible for keeping current with this research, and acting in accordance with its findings.
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 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.
Both the Superannuation Fund, and the imperative to divert investment flows towards economic activity which leaves a lighter footprint on the earth, represent a new inter-generational pact. It is an acceptance that we need to be less optimistic about the capacity of future generations to find ways of overcoming the environmental and social problems we leave for them to fix. To quote John F. Kennedy – who was undoubtedly quoting someone else: “If not now, then when? If not us, then who?”