The responsibility to act

Tim Stewart
— 1 minute read

It’s becoming clear that most Australians expect their money to be invested responsibly, so what is stopping the industry from taking action?

Last week saw the release of new research that found 92 per cent of Australians expect their superannuation and other investments to be invested responsibly and ethically.

The survey, conducted by Lonergan Research on behalf of the Responsible Investment Association Australasia, was unveiled at the 2017 RI Conference in Sydney last week.

It also found that 69 per cent of Australians want their fund to consider environmental, social and governance (ESG) factors about the companies they invest in – rather than focusing solely on financial returns.

The biggest demand came from Millennial investors, of whom 75 per cent said they preferred responsible investment to a ‘returns first’ approach.

Given that a massive transfer of wealth is set to take place over the next few decades, it would make sense to pay attention to the likely recipients' investment preferences.

Millennials are typically more attuned to environmental and social issues, and it appears they're willing to vote with their wallets.

The Responsible Investment survey came the day before Commonwealth Bank chair Catherine Livingstone told shareholders that Australia's largest bank is winding down its funding of coal projects.

"Our coal funding is comparatively small and has been trending down for some time," Ms Livingstone said at Thursday's AGM.

"We expect that trend to continue over time as we help finance the transition to a low carbon economy."

All four of Australia's major banks have now made public statements indicating they will not finance the Adani Carmichael project in Queensland's Galilee Basin, which would be the largest coal mine in the world.

This follows comments by the prudential regulator, APRA, that it will no longer consider climate risk to be 'non-financial' in nature.

In a speech delivered on 17 February 2017, APRA executive board member Geoff Summerhayes said many climate risks are "foreseeable, material and actionable now".

"Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to," Mr Summerhayes said.

In the same speech, Mr Summerhayes referenced a legal opinion by barrister Noel Hutley SC that suggested super trustees could be vulnerable to legal action if they ignore climate risk.

So what is stopping asset owners from taking action to mitigate risks like climate change and delivering the responsible investment their members want?

Speaking at the RI Conference last week, Australian Ethical managing director Phil Vernon put it down to a series of "myths" about the fiduciary duties of superannuation trustees.

First, he pointed to the relevant legislation: section 52 of the Superannuation Industry (Supervision) Act 1993.

A key requirement contained in the act is that trustees perform their duties and exercise their power in the best interests of beneficiaries.

"That section is all about due process – it's all about making sure you operate so as to avoid a conflict of interest. That you're operating in your beneficiary's best interests as opposed to your own interests," Mr Vernon said.

"That has been interpreted as best financial interests, but it doesn't mean that you need to achieve the best financial outcome in all circumstances."

This means that professional money managers are protected under the act as long as they are considering the long-term financial interests of their clients/members.

Mr Vernon’s message to trustees is that 'FOMO' (fear of missing out) is not a legal obligation: trustees will not necessarily be held to account for returns they could have otherwise achieved.

A second myth pertains to APRA's prudential practice guide on the same topic, titled SPG 530: Investment Governance.

"This actually gives funds the explicit permission to apply an ethical screen or adopt an ethical option, provided that you still meet your fund objectives," Mr Vernon said.

Of course, the fund must still tick all of APRA's other boxes when it comes to diversification, liquidity and a coherent investment strategy.

"But SPG 530 doesn't say 'provided that you still achieve as good a financial outcome as you would otherwise have achieved'. That doesn't mean you [can't achieve that outcome], but it doesn't prevent you from taking action," Mr Vernon said.

The key point, he said, is that super funds have regulatory "permission" to think about a framework through which they can apply an ethical approach to investment.

Considering that's what Australians say they want, it's time for the industry to take action and start delivering it.

Tim Stewart is the editor of InvestorDaily.


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