Richard Di Natale for the Greens observed: 'The reality is that tobacco is a sunset industry. The trail of death that it leaves in its wake makes it an unsustainable business. We simply cannot afford to continue investing in this industry. We cannot support it. It is unthinkable that we send any more public funds its way—funds that come at the expense of its victims. This investment is irresponsible. It undermines our work on tobacco control and makes a mockery of our treaty obligations. It is unsustainable and unethical and the public want it to stop.'

In response, Ursula Stephens for the ALP observed: ' I need to say that it was the view of the committee, the Future Fund and of course the government that the bill would create ambiguity around the role of the Future Fund board and the potential for conflicts of interest in objectives when making investment decisions, that the provisions of the bill would constrain the ability of the board to deliver on its long-term investment strategy and would have serious implications for costs, financial returns and the strength of the government's long-term financial position.'

Senator DI NATALE: Mr Burgess, can you tell me what the current value of the tobacco holdings in the Future Fund are?

Mr Burgess : We use a definition of the MSCI-GICS category, and the current value as that 30 June is $210 million.

Senator DI NATALE: Can you also tell me whether there have been additional shares purchased?

Mr Burgess : I think we provided some information to 14 February; over that period shares have been sold by our managers. Just to be clear: this is all bought and sold at our manager's discretion.

Senator DI NATALE: Sorry, can you just an elaborate on that point? Since the answer that you provided me on notice, you are saying that there have been shares sold but no new shares purchased?

Mr Burgess : In aggregate, the number of shares have been sold. So the value has gone down, but also the number of shares have gone down on top of that.

Senator DI NATALE: There have been some shares purchased and some sold, but the aggregate is fewer shares. Is that what you are saying?

Mr Burgess : That is correct.

Senator DI NATALE: I agree with you again that I think that you need to take a long-term outlook. So let us have a little look at the tobacco industry. In the United States v. Philip Morris, we had the United States District Court Judge there quoting that the tobacco industry 'survives, and profits from selling a highly addictive product which causes diseases … a staggering number of deaths … immeasurable … human suffering and economic loss, and a profound burden on our national … system'. The tobacco companies have known all of this for 50 years or more but they have continued with enormous skill and sophistication to deny these facts in public. This is all on the public record. We know that they have lied about the impact of smoking on lung cancer. This has occurred over 50 years. This was a ruling from a US District Court Judge. Given the 50-year-plus history of what I think is very shameful behaviour and anything but the actions of a good corporate citizen, how do you expect to be able to change that through engagement with the industry?

Dr Burgess : There is a lot of history there and opinions about the tobacco industry—

Senator DI NATALE: Are you denying that anything I have said is incorrect? This is not a question of opinion; this is all fact, and you have used the word 'opinion'—

Dr Burgess : You were talking about the history of the tobacco industry over many decades. I have been with the fund for a year. We have had a policy since February. Let us be clear about it. I think what you are talking about is the role of exclusions. How do exclusions work in the fund? What is the approach of the fund when it comes to exclusions? As you aware, there are opinions on lots of industries and lots of issues out there in the community. So we have to be very careful in having a very clearly defined exclusions process. We have discussed this before. We look for a diversified portfolio. We ensure that we are focused on our mandate. We ensure that we allow for risk. We ensure—and this is an important point—that there is no breaking of Australian laws or conventions or treaties. And then we ensure that they follow our ESG policies. I think the most important issue is to have that framework to ensure that you have a clearly defined approach to the way that you look at exclusions in a portfolio

Senator DI NATALE: So rather than perhaps documenting the known and established track record of the tobacco industry, let us look at some of the companies that the Future Found is currently invested in. We are invested in 15 tobacco companies as of today. As of 30 June this year, we had about $57 million worth of shares in British American Tobacco. British American Tobacco gets most of its cheap tobacco from Africa. In countries like Malawi, for example, British American Tobacco, through its business practices, employ about 78 per cent of kids between the ages of 10 and 14 and 55 per cent of seven to nine-year-olds on tobacco farms for less than two cents a day. They have no protective clothing. There is malnutrition and nicotine toxicity. Kids are subject to abuse if they do not turn up to work on time. That is all aside from the fact that, in Africa, young kids are a very attractive new market for British American Tobacco. Given that $57 million holding, can you tell me how you expect to improve the behaviour of British American Tobacco as a corporate citizen through your engagement?

Mr Burgess : First of all, I cannot comment on the specifics that you have just raised. Let me give you an example of our process. If specifics are raised to us about a company, we have a very clearly defined process to review and look at that. We demand that our managers review and look at that and then we use service providers to review and look at that, and these are specialists in determining the corporate behaviour of companies. In this case, you are using British American Tobacco. If we are presented with examples as you have just given us today, we will look at that closely and review it to ensure that the company is behaving according to the standards that we expect, the laws, the treaties of Australia and the conventions. I think that is a very well-defined process and that is the way we approach looking at any investment.

Senator DI NATALE: As of 30 June 2012, the tobacco company that had the highest rate of return that the fund was invested in was an Indonesian company, Gudang Garam Tbk. They are the company that makes those lovely clove-smelling cigarettes, including the ones with the sweet tips that the kids like so much. In Indonesia, the average age for a kid to start smoking is under 10. There are about 65 million smokers in Indonesia. The company involved markets very heavily and targets very heavily young kids. In fact, I understand they sponsor schools and so on. Again, we have several million dollars invested with a 50 per cent return. It is a very healthy return, would you agree?

Mr Burgess : A 50 per cent return is a good return. That is true.

Senator DI NATALE: The question I have is that, given the behaviour of that company, how is it consistent, again, with ensuring that our ESG policy targets those industries with a poor track record and ensures that we improve that behaviour?

Mr Burgess : I think today you have outlined a series of views and opinions on the behaviours of companies—

Senator DI NATALE: No, these are facts. I have outlined a series of facts about the behaviour which these companies are engaged in.

Mr Burgess : As I mentioned, when we are presented with facts as you have outlined today, we will review them and look at them. So I will take that on notice and come back to you with a comment on those issues. That is what you would expect. There are a lot of opinions about companies. People may have views about the way a company is operating and behaving. The key is to do research. The key is that our managers do research into that. We use a variety of world-class service providers to assess the corporate behaviour of these companies. I will have to take your discussion on those points on notice but we will review that for you and come back to you.

Senator DI NATALE: Thanks very much for the opportunity to ask you questions, Mr Gonski. Firstly, I sincerely congratulate you on your appointment as Chairman of the Future Fund. You have made an enormous contribution to public life here in Australia on issues such as education, philanthropy and so on. I think they are a testament to you, and you have done some great work in many areas. So, once again, congratulations.

It will not be a surprise that many of the questions I will be asking you today relate to the Future Fund's investment in tobacco. I was pleased and a little surprised to read on 25 and 26 October that Mr Burgess, the managing director of the Future Fund, announced that the governance committee was considering investment in cigarette manufacturers after a request from the board. I just wanted to learn a little more about how that came about and, in fact, a little more about the governance committee. Do I take that to mean the ESG committee? Would that be correct?

Mr Gonski : Senator, when I became chairman, coming from a world more involved with committees, I decided it was appropriate that we should have a network of committees that were focused on what they were set up for and could assist the board in coming to our conclusions. Each of these committees is drawn from board members, or guardians if you prefer to call them that. One of the committees we established was the governance committee. The governance committee was to look at matters such as the ones you are referring to. It will be an active committee and its realm, its charter, which took the first meeting to establish, includes matters such as ESG and those to which you referred.

Senator DI NATALE: I would like to ask you a little bit more about the committee. I must say it is a surprise because reading the publications, the news reports, from last week the statements from Mr Burgess indicate that the review has come up in the normal course of events. In another quote from the Australian Mr Burgess indicates:

We are always looking at the overall framework and policies that we have adopted.

He then goes on to outline the investment in companies that manufactured cluster bombs and divestment in that area. But what you are indicating to me is that this is a new subcommittee and, in fact, this is not the normal course of events. Is that correct?

Mr Gonski : The first part is correct. It is a new subcommittee. The second part is that it is in the normal course of events. This is exactly what we set the committee up to do and it is doing its job. Basically we refer to that committee the issues of ESG and other things. The committee has only had, from memory, three meetings. It had substantial things to do in the first one—that is, set itself up—in the second one it had other things to do and in its third one, quite appropriately, it looked at this matter in the ordinary course.