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‘We’re actually being squeezed’: Super funds pressured by proxy adviser crackdown

4 minute read

Super funds are in a tug of war between member and regulatory pressure for climate action and the government’s latest move clamping down on proxy advice, the chair of Spirit Super has said.

Treasurer Josh Frydenberg recently declared a litany of proposed rules for proxy firms, including a requirement to obtain an Australian Financial Services Licence and to provide their research and advice on companies they’re the subject of at least five days before handing it to their investor clients. 

If a proxy adviser’s client is a superannuation fund, the proposed legislation will require them to be independent from their client.

Spirit Super chair Naomi Edwards has said the proposed legislation is “another thing that’s squeezing super fund trustees”.

“We simply cannot go and talk to every company that we invest in about what they’re doing on climate change and climate risk,” Ms Edwards told viewers of the Actuaries Institute Virtual Summit. 

“So we outsource that investigation, analysis, engagement, to proxy advisers. And most of Australian industry super funds, pretty much all of us use a group called ACSI [Australian Council of Superannuation Investors].”

ACSI members include 36 Australian and international asset owners and institutional investors, mostly superannuation funds. Collectively, they own on average 10 per cent of every ASX 200 company, ACSI has reported. 

But under the new legislation, the body would not be able to directly have a relationship with super funds. 

For a smaller fund with already limited teams, the capacity might not be available to internally manage climate risk analysis. The pressure could be another contributing factor to ongoing mergers in the superannuation sector, Ms Edwards said.

APRA also recently released its draft guidance around climate risk management, which will see super funds report on how climate change will affect their businesses and how they’ll manage the risk. 

“It’s not going to be cost-effective for us to do what APRA and what our members want us to do,” Ms Edwards commented, on managing climate risk without external proxy advice. 

“And we’re actually being squeezed between our members, who have a very strong desire – it’s the single most important thing that we get lobbied on by our members, particularly our younger members.”

The landscape for super trustees has been “changing incredibly rapidly” however and will keep evolving.

The draft Your Future, Your Super reforms have proposed account stapling, which could see members tied to a fund potentially for life. 

“Therefore trustees are going to be very, very interested in the views of young people,” Ms Edwards said. 

“And of course, we all know that young people are the people who not only will be most affected by climate change, but who care most about it.”

Trustees have also watched the precedent Rest case, where a member sued the fund for failing to protect his money against climate change, and the recent legal opinion from eminent QC Noel Hurtley, who has told super funds must, under current law, take climate risk into account.

Mr Hutley has also advised super funds that if they have made public commitments about climate action, such as pledging to a net-zero emissions target, they must have reasonable grounds on which to back up that statement. 

“Basically, you can’t greenwash,” Ms Edwards said.

Trustees are in the middle, needing to balance all of the different pressures to manage their funds’ exposure to climate risk. But the Spirit Super chair has predicted there will be more changes to face.

“I expect that just as we are racing to change our monitoring and analysis of risks and our commitments, so too, I think that the risks that we’re looking at, so in terms of carbon stranding… or tolerance for investments in thermal coal, I think that will change extremely rapidly,” she said. 

“So I think it’s appropriate that there’s a very high pressure on super funds to move quickly in the space, because I suspect that the valuation of some of our investee companies are going to change rapidly over the next few years as these pressures come to bear.”