16 March 2010 – Ranked in the top quartile for climate change leadership and best practice in the latest Climate Institute survey are – in alphabetical order – AustralianSuper, Cbus, Christian Super, HESTA, HOSTPLUS, Local Government Super, NGS Super and Vision Super. The news is not so good for the rest.

Superannuation fund members have just been hammered by the Global Financial Crisis, but the fund managers seem to be largely ignoring the risk from climate change which possibly the “single biggest threat to superfund members’ long-term returns.”

Even more worrying is that the managers somehow expect – erroneously – that their asset consultants will come galloping to the fore armed with knowledge and sound advice on the issue.

That is the view of the Climate Institute after its survey of superannuation fund managers, which revealed very poor understanding of the risks to the average nest egg from climate change

“The physical and policy impacts from climate change are already impacting specific assets and asset classes” said the institute’s report on the survey. “More worrying is the potential for sudden, widespread repricing of global markets and panic regulation with the potential to drive down values across many or all asset classes.”

The report is based on the second annual survey of the Asset Owners Disclosure Project, which was established by The Climate Institute in partnership with the Australian Institute of Superannuation Trustees, to assess the “readiness of Australia’s superfunds to manage the risks and maximise the opportunities associated with climate change.”

One of the key messages from the most recent survey is that the superfund industry remains ill-equipped to measure or manage climate change risks, despite being aware of the potential impacts on their investment portfolios.

Not so for leading super funds.

Ranked in the top quartile, for leadership in climate change best practice, in alphabetical order, were: AustralianSuper, Cbus, Christian Super, HESTA, HOSTPLUS, Local Government Super, NGS Super and Vision Super.

Another positive was that 78 per cent of surveyed funds showed a high level of willingness to participate in shareholder resolutions relating to climate change. And 69 per cent were involved in collaborative initiatives such as the Investor Group on Climate Change and the UN Principles for Responsible Investment.

Highlights of key findings from the report follow:

  • There has been a communication failure between superfunds and their advisors, asset consultants, with respect to responsibility for managing climate change-related issues.
  • Significantly, 67 per cent of asset consultants have no climate change-related service, yet this survey, like last years, indicates that superfunds are expecting to be able to call upon their asset consultants to provide advice in this area.
  • Despite the G20 recommendations regarding managing systemic risks (such as climate change) and the lessons learned from the sub-prime collapse, short termism still dominates the superfund industry. Only 9 per cent of funds see the G20’s recommendations as having substantial implications for long-term risk management procedures.
  • Superfunds trustees are still uncertain as to the scope of fiduciary duty with respect to managing environmental, social and governance (ESG) issues such as climate change. Only 38 per cent of funds viewing the consideration of ESG issues as being consistent with their fiduciary duties and/or the sole purpose test, significantly lower than in last year’s survey.
  • Most Australian superfunds are still over-exposed to climate change-related risks and not yet taking advantage of the opportunities arising in the new, low-carbon asset markets. While only 34 per cent of funds have considered the implications of Australia’s delayed transition to a low- carbon economy, of those that had considered the issue, over 90 per cent believed that the delay may be detrimental to long-term returns. This hints at something of a “credibility gap” – funds understand the financial implications of a delayed move to a low-carbon economy, but few are taking the necessary steps to manage this risk.

Major Findings

  • Climate change capability –  asset consultants vs. superfunds There appears to be a stand-off between Australian superfunds and their asset consultants with respect to taking responsibility for managing climate-related issues. Superfunds are relying on their asset consultants to provide advice in this area, yet few in the asset consulting industry have the requisite skills to do so. However, the survey shows that few superfunds are making explicit requests for this type of research. This leaves the superfunds and asset consultants in a stalemate over who has responsibility for integrating climate change risks and opportunities into investment strategy.
  • Short-termism continues to reign supreme despite G20 recommendations – In 2009 the G20 made a number of crucial  recommendations aimed at preventing future systemic risks such as those which led to the sub-prime collapse. However, only a handful of Australian superfunds believe there will be implications for their own risk management procedures.  Despite the lessons of the financial crisis, short-term thinking remains the order of  the day in Australian superfunds.
  • Industry leaders are moving further ahead of the pack – A distinct gap is emerging between the leading funds and the “average” fund. The leading funds are particularly strong in the areas of member communication and climate change policy/governance. The smaller funds that were surveyed, with the exception of one particular superfund, typically received a lower rating than the larger funds. This reflects the general lack of resources that smaller funds have available to dedicate to climate change and more general environmental, social and governance issues.
  • Scope of fiduciary duty remains unclear – For some time there has been wide and vigorous debate within the superannuation industry, both in Australia and overseas, regarding the fiduciary duty of trustees around environmental, social and governance issues. The United Nations Environment Programme Finance Initiative’s “Freshfields” report of 2005 was the first signal to trustees that consideration of these types of issues was consistent with fiduciary duty and the goals of long-term member returns. Freshfields was re-issued in 2009 with a notable strengthening of this message (it stated there was an obligation to consider ESG issues). The implications of this report have yet to be clarified by APRA and continue to cause confusion amongst to trustees as to the scope of fiduciary duty. It would be helpful to have this issue clarified formally in lieu of waiting for a test case to emerge in the courts. In last year’s survey, 83 per cent of funds saw consideration of ESG issues as being consistent with their fiduciary duties and/or the sole purpose test. This year only 38 per cent of funds took this view, with a little over half of surveyed funds (57 per cent) having not yet considered the issue or discussed it at Board level.
  • Treatment of climate risk inconsistent – The survey responses show a remarkable lack of consensus as to the likelihood, impact or overall risk posed by climate change. 69 per cent of funds were unsure if the threat of global climate change required some form of hedging.
  • No data- The key area where all funds, including leaders, are falling behind is in portfolio-level climate change management. Superfunds generally do not have systems and/or access to information to manage climate risks at the portfolio level. The data management challenge cannot be underestimated as a potential barrier to climate change best practice. However, there is comfort in knowing the data already resides in many databases and across investee companies, fund managers, custodians and the funds themselves. Aggregating, analysing and mining this data will doubtless become a key feature in the future for climate leaders.
  • Funds more involved in active ownership – It’s not all gloom however.  Surveyed funds showed a high level of willingness to participate (78 per cent) in shareholder resolutions relating to climate change. Around 20-25 per cent of funds were willing to participate in resolutions that directly address an investee company’s exposure to climate risks. Around 10 per cent of funds are also willing to participate in resolutions that address investee companies’ lobbying of government on various emissions targets and carbon reduction legislation. In addition, compared to last year, a greater proportion of funds (69 per cent) were involved in collaborative initiatives such as the Investor Group on Climate Change and the UN Principles for Responsible Investment.

BACKGROUND TO THE SURVEY
The survey was sent in September 2009 to 102 Australian superfunds each of which had more than AU$300 million under management (two-thirds of the value of the Australian superannuation industry). Just over 30 per cent of invited funds responded to the survey, representing a total of AU$302 billion in funds under management (28 per cent of the Australian superannuation industry). The survey encourages funds to engage in climate change related issues, often for the first time. In addition, the survey’s visibility and credibility enables participating funds to demonstrate their commitment to carbon disclosure and emissions management.

See the Climate Institute website for the whole report