The class action risk for super funds dumping resources

A decision by the trustees of ANU’s superannuation fund to divest resources holdings could result in members taking legal action.

Trustees of big superannuation funds like the Australian National University are taking considerable personal risk if they divest fossil fuel resource stocks as a result of their personal environmental beliefs.

There are people already making preliminary preparations for such actions against trustees should members of the funds suffer. Those actions are being considered on a national interest basis but of course, will be years away.

And while I am not normally in favour of such actions, big superannuation funds are there for member benefit, not to invest on the basis of the personal beliefs of the trustees.

The trustees of superannuation funds have a fiduciary duty to maximise returns for members. That does not mean that they have to always make the right investment decisions, but all decisions have to be taken in good faith for the benefit of members.

If the trustees assembled a large amount of research which showed that fossil fuel stocks were likely to perform worse than other shares, then the trustees would be on stronger ground.

But all the indications are that the latest decisions reflect either the personal environmental beliefs of the trustees or that those trustees feel they are under pressure from people who have certain beliefs. In the case of a university, the pressure might come from students.

If the trustees are making the decision for a defined benefit fund, as may be the case in a university like the ANU, then there is an understanding that the university will guarantee that the promised benefits are delivered to members.

It would then be the university that would have the cause for action against the personal assets of the trustees. Such an action would be most unlikely unless the trustees were acting against the wishes of the organisation providing the guarantee of member benefits. 

But for the vast majority of superannuation funds, it is the individual members of the fund who will be the losers if the trustees’ decision to quit certain stocks on personal belief grounds reduced investment returns. Members could take class actions against the trustee’s personal assets.

I am not sure that the fund would be able to use members’ money to help with trustees’ legal costs. That would need to be determined by the courts. Of course, the trustees might not have enough personal assets to make a major class action case worthwhile, except on national interest grounds.

There is good reason why the law is harsh on trustees of big funds who use members’ funds to pursue their own personal agendas.

Superannuation is designed to help people in their retirement. If individual members of a fund want their superannuation invested on the basis of personal beliefs, then they might request a separate fund or more simply start their own fund.

It’s ironic that one of the stocks that was picked out by the ANU trustees was Santos. Santos is a major Australian natural gas and coal seam gas producer.

Coal seam gas is produced by fracking. The US has transformed its carbon emissions by switching from coal to gas, which is produced by fracking and is urging all countries to follow. In Queensland, fracking is also transforming the fortunes of farmers (How Australia missed the fracking boat, October 30).

The bottom line is, if the fossil fuel stocks -- that are banned on the basis of the personal views of trustees -- perform badly in coming years, then there will be no action because members have not suffered.

But if they perform better than the market and members returns are reduced, then there will almost certainly be an action against the trustee’s personal assets.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles