Aussie sovereign wealth fund ditches subsidiaries of Chinese state-owned firm following US sanctions

Divestment revealed when Future Fund’s CEO was pressed on the issue by Aussie Senator

Australia’s sovereign wealth fund has divested five subsidiaries of Chinese state-owned aerospace and defense company, Aviation Industry Corporation of China (AVIC).

Today’s revelation came during a Finance and Public Administration Legislation Committee meeting in the Australian Senate, in which the Future Fund was examined, in a dialogue between Deputy Leader of the Australian Green Party in the Senate, Nick McKim, and Dr Raphael Arndt, CEO of the Future Fund.

The Senator pressed Arndt on AVIC in relation to an October 2021 investigation by Justice for Myanmar that claimed the sovereign wealth fund was invested in AVIC subsidiaries, which the NGO said are linked to the junta’s regime.

Arndt said the Future Fund had divested the subsidiaries, however, he explained this was in response to an  announcement last year by the US Treasury that one of AVIC’s subsidiaries – Avic Shenyang Aviation Company Limited – would be subject to investment sanctions, as part of the Treasury updating a list of Chinese companies with alleged ties to defense or surveillance technology sector.

Arndt said the Fund had been invested in the subsidiary through it being a holding in the MSCI Emerging Market Equities Index.

“The way that our process works is that our investment managers are required to comply with sanctions, including from the US government, and proceeded to divest that position. Under the sanction that was issued, they had until June of this year to do that. I believe the response to the FOI request [by Justice from Myanmar] was October 2021 and in November of 2021 that position was fully divested,” he explained.

When McKim pressed him on whether AVIC was divested, Arndt added: “There were several AVIC entities in the FOI disclosure you are referring to and one of them was sanctioned by the US Treasury, but our process is to look at other closely related companies, so yes we have divested from all of those positions.”

Subsequently the Senator asked him whether the Fund was invested in parent company AVIC – not just its subsidiaries – at any stage, and whether any investment managers or investments were in breach of a US sanction applied to the parent company in November 2020.

Dr Arndt said he would “take that on notice”, meaning he opted to seek further information and provide a response to the Senate at a later time.

Earlier this month, RI reported that KLP Asset Management was engaging AVIC as part of its involvement in the €3trn investor engagement group on Myanmar.

AVIC could not be reached at the time of publication.

Several other questions put forward by McKim were taken on notice by Arndt, including what other government sanctions – in addition to the US – the fund’s investment managers watch and whether the fund could provide details around whether it has invested in any companies in the “Russian military industrial complex”.

On another state-owned company, the Senator asked whether the fund was still invested in Indian aerospace and defense electronics company, Bharat Electronics, which Justice for Myanmar also claimed in its investigation is linked to the junta’s regime.

Arndt said: “We haven’t divested that particular company…there are no sanctions applied to that particular company by any developed market regulator.”

Bharat Electronics is currently being engaged by Dutch investment giant PGGM regarding Myanmar, but has been divested by Nordea Asset Management.

Today’s dialogue in Senate comes as a controversial Bill is being proposed, which would amend the Freedom of Information Act “to provide a partial exemption for documents handled by the Future Fund Board of Guardians and the agency in relation to the board’s investment activities”.

McKim has been a vocal critic of the Bill. He previously told RI: “We need more transparency, not secrecy. We need the Fund to be held to account on the investment decisions it makes. It’s public money, Australian people have every right to know how their money is invested.”

Indeed, following today’s meeting he speculated the Fund’s divestments might not have occurred without the FOIs from Justice For Myanmar, which revealed the investment.

McKim has also called for the Fund to immediately divest from all weapons manufacturers and fossil fuel companies.

At the time of publication, RI had not received a response regarding the Senator’s subsequent comments from the Fund or the Australian Treasury outside their office hours.