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Many super funds have backed the integration of environmental, social and governance (ESG) risks into their portfolios, but few have communicated this in product disclosure statements or show evidence of factoring them into their investment decisions, the Australian Institute of Superannuation Trustees (AIST) Governance conference was told last month.

IF ESG risks are considered as being material to long-term returns, and investment strategies that factor them in are appropriately defined, justified and implemented, funds are probably acting within legislation and trust law, Scott Donald, director of fiduciary at Russell Investments, told the conference. A lot of industry and retail funds and investment managers have accepted ESG risks by signing the United Nations Principles of Responsible Investment (UNPRI).

If a fund announces its intention to involve ESG in its investment process, but then does nothing, it would breach the Corporations Act and Section 52(2) of the Superannuation Industry Supervision Act, which pertains to covenants in the governing rules of a trustee, Donald said. Looking at 19 funds that have signed the UNPRI, he found that only eight have disclosed this in their product disclosure statements, while 11 have displayed it on their websites. None had disclosed ESG risks in PDS risk statements. “Signing the UNPRI may not be binding, but that does not mean it does not have legal force.

“Trustees cannot spend trust assets on advocacy. It’s time to get specific.” Donald said one of the reasons why responding to ESG risks in portfolios is difficult was that funds were treating them with a high level of “generality and abstraction”. “One of the concerns I have is that people treat these kinds of risks as being too different to others,” he said. Speaking in the same session, Graeme Russell, chief executive officer of First Super, detailed how the fund’s investments in the Australian sustainable forestry – including an allocation to Gunns Limited – were accepted under an analysis of ESG risks.

The fund held that ESG considerations must relate to risk and return, and be objective. It was not a “bolt-on” feature to the investment process, but had to be “built-in” to it, Russell said. In assessing the environmental risks posed by Gunns and other companies, the industry fund for the timber, paper, pulp and furniture industries found that timber and straw were the most common renewable resources used in the building industry. “The forestry industry is the only industry with negative net carbon emissions,”Russell said, adding that First’s analysis found that sustainable forestry absorbed more carbon than a natural forest, since carbon was also stored in wood products.

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