Next year, global investor attention will focus on the court proceedings against the trustee of the REST super fund which is charged with breaching its fiduciary duties by failing to adequately consider climate change risks.
A member of the fund, Mark McVeigh, has commenced action in the Australian Federal Court in Sydney claiming that the trustee breached its legal duties in not considering climate change as a material risk to long term investment performance.
The case will provide an important test of the law, specifically whether trustees of superannuation funds are a positive obligation to give due consideration to climate change physical and transition risks to investments when managing the fund’s investments.
This is not a case about climate change. It is, however, a case about risk management and trustee duties in superannuation law, and fiduciary duties in general law.
While disappointing for some, the case will not test many of the politically contentious aspects of climate change politics and policy. The case won’t consider:
- The causes of climate change, or the adequacy of policy and regulatory responses by governments;
- The likelihood of, or potential amount of financial detriment or damage which could result from climate change related risks;
- The appropriateness of any responses the trustee should have to climate change related risks (policy advocacy, insurance, divestment, stewardship, impact investment); or
- The appropriateness of any risk appetite or tolerance that the trustee may seek to adopt in relation to climate change related risks.
Important as these issues might be, they are not likely to be the focus of the judgement in McVeigh v REST.
This is a case about the standard of care that trustees of superannuation funds owe to members in managing their investments.
Free to invest, but wait…
The freedom of trustees to exercise discretion in making investment decisions is an important aspect of the superannuation system.
There is a general reluctance for legal intervention by courts, legislators, or regulators to fetter of constrain the broad discretion which trustees have (and in my opinion need) to make strategic and tactical decisions about managing investments on behalf and in the best interests of members.
Yet the law does interfere to mandate a broad range of constraints on the discretion of trustees to manage investments.
The general law, the SIS Act, and the state trustee acts are all in concert in mandating that a trustee adheres to the appropriate level of care, skill, and diligence in exercising its powers.
Furthermore, the SIS Act prescribes factors which trustees are required to consider when exercising powers of investment. These include the purposes and objectives, diversification, risks, costs, liquidity requirements, tax consequences, inflation, and any other relevant matters.
The binding risk management prudential standard also prescribes a principles-based approach to managing material risks, including prescribing investment governance risk, investment liquidity risk, and any other risks that could have a material impact of business operations.
The case is likely focus on whether it is a breach of the trustee’s duty of exercising the required degree of care, skill and diligence in failing to identify that climate change related risks may have a material impact on the trustee’s business operations, or that the climate change risks are relevant matters which the trustee’s investment strategy should have regard to.
In a procedural hearing, Justice Perram suggested that the case is “moderately complex,” indicating that McVeigh’s claims aren’t without merit. However, he also remarked that the trustee is expected to be “thorough and searching” in vigorously defending its position.
A decision in McVeigh’s favour would provide an important precedent, while a decision in REST’s favour may simply see APRA formalising its soft position by amending the relevant prudential standards to require the consideration of climate change related risks in making investment decisions.
We will need to wait on a decision in McVeigh v REST, yet the case does highlight the growing attention being given to the role that superannuation and pension funds (alongside sovereign wealth funds and the ‘giant three’ investment managers Blackrock, Vanguard, and State Street Global Advisors) will play as shareholders and asset owners in the global economy.
Captains of industry or robber barons?
The investment activities of trustees of superannuation funds looks primed to become an area of growing public focus. This could see trustees faced with the very real reputational risks of being publicly characterised as being either captains of industry or robber barons.
The paramount priority of promoting financial best interests of beneficiaries by ensuring robust investment returns will, and should, remain the cornerstone of a superannuation trustee’s activities.
However, we are also likely to see greater focus on broader ethical, ESG impact or externality issues such as climate change becoming a point of competition and differentiation between superannuation funds.
This trend might also trigger further litigation risks for superannuation trustees questioning whether extra-financial objectives or purposes breach the doctrine of powers or sole purpose test. Watch this space!
Jonathan Steffanoni is a partner at QMV Legal.