A review of APRA’s superannuation prudential framework has found it met its original objectives but must keep evolving to ensure members’ interests are protected.

Taking stock of its efficiency since the 2013 Stronger Super reforms, the prudential regulator has identified a number of areas where it needs to do more work, flagging further improvements on ESG matters.

APRA said it plans to update the guidance on consideration of ESG factors in formulating investment strategy.

“With regard to ESG, enhancement to the investment governance standard (SP530) and guidance could be considered to reflect global developments in this area and provide clarity on the obligations of RSE licensees to take into account ESG factors when setting their investment strategies,” APRA said in a statement.

Still, MinterEllison lawyer Keith Rovers is keen to see APRA make more fulsome statements about ESG since there are ways of reconciling ESG factors with sole purpose tests and fiduciary duty.

First, he says, it is now recognised that ESG is not a mere non-monetary consideration – it has financial consequences and is a real risk for directors to consider.

In his view, APRA should examine: what the ‘interests of members’ means; how this is determined; and whether this is exclusively seen through a ‘purely’ financial interest lens.

“We are seeing members pushing funds to take a broader scope when considering members’ interests – and that those interests extend beyond pure financial interests alone – to other impacts, both environmental and social,” he adds.

Rovers argues the performance of purpose-led organisations, or those which good ESG credentials, may be a sound strategy from a risk/return perspective, so even on fundamentals it carries some weight and is consistent with duty.

“We’re also seeing the weight of money moving into ESG screened investment, so responsible investment has the momentum, including those investments which have environmental and/or social impact as a key element of the risk/return equation, whether that means accepting a lower financial return or not.
“Even on this basis an appropriate allocation to impact first may be consistent with a balance investment strategy and consistent with members’ interests.”

The lawyer noted the behind-the-scenes work by Australia’s regulators – such as their involvement in Australian Sustainable Finance Initiative and other working groups looking at ESG and climate risks.

“I think we’re well tapped into global markets given capital mobility of international finance and convergence around global accounting and insurance standards – there are a number of initiatives taking place which are in synch with global movements and our financial institutions are international players so there is a degree of synchronisation, but always local issues and delays.”

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
Leave a comment