CLIMATE SPECTATOR: Australia's super failure

Our super funds control an enormous amount of investment capital and yet they are dragging the chain when it comes to strategic investment issues like climate change.

Australia's investment chain starts with money flowing from super fund members into their respective funds. Each fund is managed by trustees who have a fiduciary duty to act in their members’ best interests, with the primary goal of achieving good risk-adjusted returns from the fund’s investments.

They hire investment managers to do the hands-on management for them and they use asset consultants to help them pick which investment managers to use. Brokers and other researchers provide specialised research for investment managers to help them make their investment decisions; and the companies they invest in are heavily influenced by the demands and expectations of investment managers, brokers and other researchers.

It would be fair to expect that these investment managers take a keen interest in climate change risk and construct their portfolios accordingly. But unfortunately, there is a cancer in the system in the form of misaligned interests.

According to APRA data, more than 75 per cent of super fund members in Australia are at least 15 years from retirement. Compare this to the timeline of those further down the investment chain, such as investment managers and brokers, whose employees get a large part of their remuneration in the form of annual bonuses. This is a substantial gap, resulting in the agents (investment managers) frequently behaving in a short-term manner that is not aligned with the long-term focus of their principals (super funds).

Superannuation funds do have one thing in their favour: they determine how they distribute their funds amongst their chosen investment managers. The larger funds, in particular, can exert influence on the contractual arrangements with their investment managers – so they can press for competently managed climate change risk if they are motivated to do so.

A major problem for super funds is that they have a lot on their plate right now. There has been significant structural change in the industry in the wake of the Cooper review, among other things, so it is not always easy for climate change to get the attention it should.

Many funds agree that climate change is an issue, but they fall down when it comes to doing anything serious about it, because it always seems far enough off into the future that inaction comes with little financial penalty.

A good number of Australian funds have committed to better management of environmental risk by signing up to the global initiative known as the ‘UN Principles for Responsible Investment’. Data from the 2009 assessment of signatories shows that, of the funds ranking in the bottom quartile, those from Australia and New Zealand rank lower than funds from any other developed countries. In other words, many funds have said will act on climate risk but haven’t actually done anything yet.

To be fair, there are a handful of large funds that are at, or close to, ‘best practice’. But the gap between our high achievers and laggards is wide.

So what should funds be doing to strategically prepare for the impacts of climate change? Here are some suggestions:

– Determine whether climate change is viewed as a material investment risk or not; and if not, determine the basis for reaching this conclusion;

– Integrate the issue of climate change into the fund’s strategic planning;

– Ensure executive KPIs are structured to encourage an operational response;

– Develop high level policies about core beliefs;

– Develop an implementation plan.

Implementation has many dimensions. Funds need to deal with their investment supply chain and, in particular, strive to align the behaviour of their investment managers with the time horizons of their fund members. They also need to tailor the plan to their own characteristics. For example, large funds have more capacity to dedicate resources to the task, whereas small funds have resourcing constraints and may be wise to devote their time to collaborative activities.

Regardless of where they are at, funds should, at a minimum, be honest and transparent with their members about their progress in climate change management.

Phil Preston is the Principal of Seacliff Consulting, a firm offering specialised consulting services in the financial and responsible investment fields. His prior work includes 17 years of financial research and portfolio management in the funds management industry.

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