Page 3147 - Week 10 - Thursday, 18 October 2007
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Whose values should be adopted in establishing screening criteria—mine or, by way of example, Dr Foskey’s? Dr Foskey has made recent comments in the Assembly on this issue, and I do acknowledge the significant interest that Dr Foskey has in this issue and, indeed, the role that she has had in the actual development of this particular report, its genesis, and the fact that this work was undertaken. But there is, I think, an example in the context of whose values a government would pursue, by illustrating the different acceptable lines that perhaps Dr Foskey and I would adopt in relation to that. Screening reduces the size of the investable universe, potentially resulting in higher volatility returns relevant to the benchmark return and, particularly in the case of negative screening, a less diversified portfolio.
A risk-based approach is holistic and broader in its reach than screening, recognising that institutional investors are universal long-term holders of broadly diversified portfolios, consistent with the prudent management and diversification of risk. The implementation of the risk-based approach with the engagement process is directly targeted at changing behaviour as a means to achieving improved environmental, social, and governance outcomes. Many of the largest institutional investors in the world struggle with the challenge of balancing these often conflicting issues.
The United Nations recognised the conundrum that investors faced in dealing with environmental, social and corporate governance issues while at the same time meeting their fiduciary obligations. The United Nations, therefore, in consultation with some of the world’s largest institutional investors, has established the principles for responsible investment. These principles are voluntary and aspirational; they are not prescriptive, but, instead, provide a menu of possible actions for incorporating environmental, social and corporate governance issues in the mainstream investment decision making. The principles reflect the recognition that environmental, social and corporate governance issues can affect the performance of investment portfolios. They also recognise that investors, in fulfilling their fiduciary or affiliate duty, need to give appropriate consideration to the issues.
This framework, endorsed and encouraged by the United Nations, is a risk-based approach to the incorporation of these issues into the investment framework. The approach is considered to be international best practice. The review report which I table today recommends that the government adopt a risk-based approach to managing the territory’s investments.
I wish to inform the Assembly that the government has fully examined the Finance and Investment Advisory Board report and agrees with its recommendations. I also advise that a third-party service provider will be engaged to assist in the implementation of a risk-based approach. The adoption of a risk-based approach for the consideration of these issues by the government is a very significant step forward. It is a measured approach; it is consistent with the approach recommended by the United Nations, and it is considered current best practice. Agreement to and implementation of the Finance and Investment Advisory Board recommendations will place the ACT government, along with the Victorian government, as the most advanced of the states and territories in incorporating environmental, social and governance issues to the general investment management framework.
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