Joondalup investment policy change not worth the risk

Joondalup investment policy change not worth the risk

THE City of Joondalup will not change its investment policy despite a request to consider giving more funds to institutions that do not invest in fossil fuels.

The Investment Policy governs the investment of the City’s surplus operational funds as well as funds held in the City’s reserve and trust accounts.

Last October, Cr Mike Norman requested a report into the options for the City to change its risk appetite and investment policy to “place a greater percentage of invested funds in institutions that have all, or a great majority, of their portfolio in fossil fuel-free investments” as long as the City can “secure a rate of return that is at least equal to the alternative offered by other institutions”.

The report was presented to the council last month, with City officers recommending the policy not change because of the associated risks.

According to the council report, as at January 31, 2019, the City had $147.1 million invested in various financial institutions, of which about 34 per cent was with financial institutions that do not invest in fossil fuel industries – Bendigo, Rural Bank and Suncorp.

It said to increase the level of investment in non-fossil fuel investing banks, the City would need to either increase its counter party limits on those banks it currently invests in, or extend its credit rating limits to include BBB-rated institutions.

At the moment, the City does not accept anything less than an A rating.

“The issue is not the interest rate of return, it is the additional risk to capital,” the document said.

“The current fossil fuel-free investment institutions offer higher interest rates than mainstream banks because they are riskier investments.”

Corporate services director Mike Tidy said the City had a “conservative policy” where it took into account both short and long-term ratings on its investments.

“Other local governments don’t do both,” he said.

At the council briefing, Cr Russell Poliwka asked if it was logical to judge the risk on long-term ratings when most of the City’s investments were short-term.

Mr Tidy said the City could not rely on short-term ratings alone, and if the City was to use only one, he would advise to use long-term ratings.

“With short-term, there is very little warning if an institution is going to get into difficulty and very little opportunity to withdraw funds if needed,” he said.

Cr Tom McLean said it was a “straight forward decision” given they were “dealing with ratepayers’ funds, not ours”.

“Risks should not and cannot be taken no matter how small,” he said.

“Financial institutions do collapse and local governments have been caught, and can be caught.

“I trust the judgement of our director and staff.”

However, Cr John Chester said he was “not entirely convinced of the risk”.

“The business community is becoming more invested in divestment,” he said.

“It’s not unreasonable to expect us to get on board with this trend.”

Cr Norman indicated if the officers’ recommendation was not approved, he would move an alternative motion for the City to preference financial institutions that do not invest in or finance the fossil fuel industry where the investment offers the City returns that are “at least equal to those offered by other financial institutions”.

He said the changes he proposed would be to the “matrix of ratings so short-term ratings only apply to short-term investments and long-term ratings only apply to any future long-term investments”.

“That would increase the spread of financial institutions the City could invest in, which in itself reduces risk, while potentially getting better overall returns,” he said.

Councillors voted 6-6 not to change the policy, with Mayor Albert Jacob and Crs McLean, Philippa Taylor, Christopher May, Kerry Hollywood and Sophie Dwyer in favour

Mr Jacob used using his deciding vote to approve the officers’ recommendation.

He said if you “strip away the ethics it does not make sense” to “increase risk for the same return”.