An unintended consequence of the Your Future, Your Super (YFYS) regime could lead to greenwashing allegations being levelled against superannuation funds in Australia.
AustralianSuper, Australian Retirement Trust (ART), Aware Super, UniSuper, and Hostplus are among the major players who have pledged to reach net zero emissions by 2050.
But Michael Aked, senior investment strategist at index firm Scientific Beta, noted that many funds are still invested in high carbon emitters in order to adhere to the YFYS regulations.
“Super funds are essentially walking a tightrope,” he said.
“YFYS performance testing imposes tracking error targets that tether them to high-emitting Australian companies, hindering their ability to achieve both satisfactory returns and an acceptable rate of decarbonisation.”
Under the annual YFYS performance test conducted by the Australian Prudential Regulation Authority (APRA), funds fail if they underperform their benchmark by more than 0.5 per cent.
However, Australia currently lacks a YFYS-compliant low-carbon benchmark like those seen in Europe, which Mr Aked said left Aussie super funds with two potential options.
On one hand, he said that funds can choose to fulfil their YFYS obligations but risk facing allegations of greenwashing for making net zero commitments that they may not be able to fulfil.
On the other hand, he said that funds can invest in line with their net zero commitments but potentially fail the YFYS performance test, which could see them subject to regulatory action.
“This presents an exceedingly challenging scenario for super funds, as both options expose them to regulatory scrutiny, jeopardising members’ funds and eroding trust,” Mr Aked said.
Scientific Beta determined that, while many funds are still allocating significant portions of their members’ funds to high-carbon companies in Australia and globally, they have failed to provide these companies with an ultimatum to either decarbonise or face divestment.
The firm has proposed that super funds publicly commit to a 7 per cent annual decarbonisation target which requires the forced divestment of so-called “carbon laggards”.
“In essence, super funds can opt to stay the course and employ the coercive power of forced divestment to compel companies to meet their decarbonisation targets, thereby driving meaningful change,” said Mr Aked.
Meanwhile, in recent months, the Australian Securities and Investments Commission (ASIC) has commenced civil penalty proceedings against Active Super, Mercer Super, and Vanguard over allegations of greenwashing.
Research published last year concluded that the design of the YFYS test made it very difficult for super funds to incorporate ESG, sustainability and carbon transition activities.
The research found that mainstream implementations of ESG, sustainability, and carbon transition activities created unsustainably high levels of performance test tracking error, putting super funds at risk of failing the YFYS test due to a “false positive”.
