The current climate risk litigation against retail industry fund REST will scrutinise standards around prudence and transparency for the superannuation industry before the courts, the lawyer leading the claim has told Investor Daily.
REST super member Mark McVeigh first filed a legal action against the trustee of the $57 billion fund in 2017, arguing that it had breached its fiduciary duties owed to him by failing to consider climate change risks.
Last year, Mr McVeigh filed a new Federal Court claim against the trustee, stating it had failed to act with “care, skill and diligence” in its investing, by not properly considering climate risk.
The lawyer leading the action against REST, David Barnden, partner of Equity Generation Lawyers, spoke to Investor Daily about what he has called “an important test case for Australia’s $2.6 trillion superannuation industry.”
It should be noted REST is one of Australia’s largest asset managers, with 1.9 million members.
“We know the industry is watching it,” Mr Barnden told Investor Daily.
“There’s a question around the interpretation of the standard of prudence for superannuation trustees, which hasn’t been aired a lot before the court.
“And so to be able to get some judicial commentary around that will be important and will certainly impact what investors will do in the future.”
Case to test transparency obligations
Mr McVeigh, who has been contributing to REST since 2013, was said to have asked for information from the fund about its knowledge on climate business risks as well as its opinion on climate change with its physical, transition and business risks.
He was also reported to have asked about the fund’s actions responding to climate change and its compliance with the Corporations Act and other laws around climate risks.
REST declared it identified and provided all of the requested information, with a spokesperson saying it has “sought and remains open to meeting with Mr McVeigh to discuss his concerns and share information about REST’s approach.”
However Mr McVeigh’s legal team argued the information provided did not allow him to make an informed judgement.
Currently, there are no specific statutory obligations which require climate change to be considered as a financial risk when exercising investment powers – however there are obligations of trustees to identify, monitor and manage material risks to investments generally.
They are also obliged to tell super fund beneficiaries any information they need to make an informed decision about the management and financial condition of the fund.
“It is a claim which one part of it is about the trustees and their duties, and the other part is about access to information,” Mr Barnden said.
“In part it will test the ability for members to take their funds to court for not being transparent about how they’re managing money. So there’s an interesting aspect to the case.”
The claim has demanded a declaration that REST violated the Corporations Act by failing to provide the information along with an injunction requiring the fund to cough up its thinking on climate risks and countering strategies.
The original claim alleged REST’s trustee should have performed additional acts to reviewing its investment strategy through a climate lens, also asking REST to comply with Task Force on Climate-related Financial Disclosures (TCFD) recommendations on disclosure and risk assessment.
“We’re dealing with a situation where we say that the trustee hasn’t adequately considered climate change impact when it invests other people’s money. I mean it’s a landmark case,” Mr Barnden said.
“It’s the first of its kind in the world, we think, and it should set a precedent about just what means to think about climate risk when these trustees are managing billions and billions of other people’s money.
“Our action is really going to the heart of what the trustees as the controlling entity of this money and what they need to do. We say that they need to have a top-down approach to climate change rather than just getting information from their investment managers.”
REST has refuted the claims, insisting climate change risks are factored into its investment strategy, as well as in the selection of its investment managers.
A ripple effect could roll out to other funds if the case was ruled in favour of Mr McVeigh.
“In terms of losses, you typically made some illegal behaviour before. You know, a member might allege loss out of misconduct,” Mr Barnden said.
“So I expect that the industry would [be] thinking closely about what they need to do to get the best result for the members. And this is particularly important as climate change is considered a financial issue, and if trustees don’t necessarily have all the information or they don’t act on that appropriately, then the funds might suffer loss.
“And so there’s a question to be asked later down the track around losses, something as a result of mismanagement.”
BlackRock, for example, was estimated to have lost its members $132.8 billion over the last decade by investing in fossil fuels.
Interestingly, Mr Barnden has previously acted in a similar investing case before – having represented two shareholders in a case against CBA, claiming the bank inadequately disclosed climate risk.
Potential new regulation standards or laws
Regulatory change resulting from the case, according to Jonathan Steffanoni, partner at wealth management and superannuation law specialist QMV, could include changes from the prudential watchdog.
APRA could amend the existing risk management prudential standard to require that super trustees consider climate change as a material risk within their risk management frameworks.
Alternatively, a legislative approach, similar to the Modern Slavery Act could be pursued to require trustees and other long-term investors to identify, address and report to regulators on how climate change-related risks were being managed. This approach however would require the “political will.”
A decision in Mr McVeigh’s favour would “create a binding interpretation and precedent of the law as it relates to superannuation trustees’ investment decision-making in circumstances akin to those of Mr McVeigh,” Mr Steffanoni commented.
“Specifically, where the member has defaulted into a MySuper product, not having provided any instruction to the trustee concerning investments.
“While such a decision would require trustees in a similar position to identify and consider climate change as investment-related risk, it would not prescribe any approach to addressing the risk. Trustees would still then need to determine whether the risk is best controlled through divestment from certain assets (such as coal), focus on impact investments (like carbon capture), or the use of its role as shareholder to advocate for changes in the manner assets operate.”
However, the case has been framed through the lens of climate change as a financial risk, so it is unlikely to focus on precedents related to ethical or responsible investing, he added.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].