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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.

Looking at social aspects, First
observed that sustainable forestry supported major regional communities in Australia
by employing people, and improved the national balance of payments. This
contrasted with some offshore timber and wood industries, which run to much
lower environmental and labour standards than those in Australia, and were unlikely to be
sustainable.

For governance, the fund found that the use of land in Australia
is highly regulated, with 11 million out of 149 million afforested hectares
available for use, of which 9 million hectares had been qualified under global
forest certification standards. “Government policy and private investment in
the industry is highly transparent, and there is nothing shortterm about it.” The
fund also applied normal corporate governance tests. The result of First’s ESG
analysis was that sustainable forestry was a viable industry for investment. “Rejecting
investment in these industries may fail the objectivity test.”

 

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