Prodding the benevolent super tyrant

The era of individuals socialising losses is declining with the collective 'citizen investor' - super funds - slowly awakening to its interest.

I knew we were in trouble when a leader in the Australian financial services sector told us “in our business mate, 90 seconds is a f***** eternity”. We’d met him to discuss our efforts to re-prioritise long-term interests in the more than $1 trillion superannuation industry.

Since 2007 The Climate Institute has 'followed the money' back up the investment chain, tracking the basis for investment decisions in high-carbon assets like coal power stations, coal mines and more. In Australia over $1.6 trillion, more than Australia’s annual GDP, is held in superannuation funds whose legal purpose is to manage funds for our long-term interests – our retirement.

With an average life of 20 years for superannuation accounts, we’ve wanted to understand how these funds are managed and to what extent longer term risks – like the implications of accelerating climate change, and potential responses to it – were factored in.

How do superannuation trustees, to whom we entrust management of our retirement nest egg, analyse and embed such considerations through the links in the investment chain? This is a chain that extends from your money to the trustees, to fund managers and to market traders such as our friend above.

Days before the 2007 federal election, we hosted a meeting of leaders in the superannuation industry and it was clear that there was at best an emerging awareness of these issues. Reflecting on the discussion one participant said a bit quietly, “it’s true – we own the coal lobby”.

It was an exciting moment, full of potential. Yet subsequent years have shown the challenges of moving the managers of our retirement funds from awareness, to asking questions, to taking action in their investment decisions.

In those early years, we teamed up with the Australian Institute of Superannuation Trustees to conduct ground-breaking surveys of the managers of Australian superannuation funds in what we called the Asset Owners Disclosure Project.

There were positive stories of funds asking more questions of emission reduction strategies of companies and some investment action in climate solutions. However, the reality is that most investment action is dominated by the market traders, short-term returns and a group-think that sees superannuation funds huddling closely around index performance measured mostly on quarterly performance.

Because of this dominance of short-termism, many of us are accidental investors in businesses that care little for the medium or long-term, with funds investing on average about 2 per cent of funds under management in low-carbon solutions. As the head of the OECD noted recently, more than 55 per cent of investments are in high-carbon or climate exposed investments.

The challenge of engaging longer-term thinking reveals, yet again, that while climate change is a threat multiplier, climate action can be a solutions multiplier.

As we posed questions about the chronic short-termism from a climate perspective, we realised that we were joining a tradition of citizen calls for corporate responsibility dating as far back as the 1600s when Amsterdam’s religious groups boycotted the Dutch East India Company over the use of violence in its trading operations. The history book of corporate campaigns has considerably thickened since then, driven by the faith, union, environmental, and anti-apartheid movements.

But recent activism in the superannuation industry is part of an even more exciting and profound development that has arisen with the tremendous growth in scale and influence of the global pool of monies invested on behalf of citizens for long-term benefits. These include superannuation and insurance funds, but also include sovereign wealth funds established by governments to manage taxpayer funds for the longer term, such as Australia’s own Future Fund.

These funds have become what are called 'universal owners', investing across all asset classes from infrastructure, to health to agriculture to property. Old time financial barons such as the Rockefellers could privatise the gains in selective investments like polluting industries, but socialise the losses caring little for consequences elsewhere. There are still a number of these barons around but these funds have skin in the game on good governance and longer term sustainability across all parts of the economy.

Together, these funds have moved from about 15 per cent of global share markets in 1995 to more than 50 per cent now. With around $60 trillion under management, they represent the largest pool of capital available today.

They can be immensely powerful if what has been called the global democratisation of capital ownership or the rise of the citizen investor can reap its full potential.

It is early days but some funds have already begun demolishing old rules and habits, laying the groundwork for a new 'constitution of commerce' – or civil economy – one in which investors, corporate executives, information providers, civic lobbies, political parties, unions, religious institutions and involved citizens all play a role.

There are plenty of hurdles ahead but you and I can put an end to the days of being an accidental investor not only by understanding more about how our superannuation funds are managed, but also by actively engaging in their management.

John Connor is chief executive of The Climate Institute, which on Wednesday released its report Climate Smart Super: Understanding Superannuation and Climate Risk.