Investment managers can expect their agreements with superannuation schemes to be revisited and reset in light of the landmark settlement Retail Employees Superannuation Trust (REST) Super made with a fund member this week over its investment consideration of climate change.
There will be a ripple effect resulting from this settlement in many areas, prominent superannuation lawyers and asset consultants have said, with one of the first order impacts likely to be a swift revisiting of investment manager agreements.
“Investment managers can expect to have investment management agreements renegotiated to enable trustees to hold investment managers more accountable for what they are doing to manage climate change risk,” Mark Bland, a partner with Mills Oakley told Investment Magazine.
Bland added that it’s not just how investment managers account for climate change risk in their portfolios and investment process, but it’s also how they disclose information to the funds and ultimately to members which will be important as their agreements with super funds are reset.
The REST settlement has set a new minimum expectation for the superannuation industry, Simon James, Willis Towers Watson senior investment consultant commented.
“And it stands to good reason that given most asset owners outsource a large component of their portfolios to external managers, that these minimum expectations are reflected in the IMAs governing outsourced relationships,” James said.
“We expect the outcome of the REST case will accelerate progress in this area as asset owners look to align high level net zero commitments with implementation actions,” he said.
On Monday a case brought to the Federal Court by 25-year old Mark McVeigh against the $57 billion fund was adjourned after REST agreed to settle. The super fund subsequently released a statement pledging support to a Task Force on Climate-related Financial Disclosures zero emissions by 2050 report.
David Barnden (pictured), principal lawyer at Equity Generation Lawyers, the lawyer who represented McVeigh, also noted the likely knock on affect of the REST settlement on investment manager agreements in an interview with Investment Magazine on Wednesday.
“It’s difficult to know how different funds may approach it but there is a duty in the SIS Act for the fund trustee, wherever necessary or desirable, to require investment managers to provide information to them. And so it’s certainly conceivable that information about climate change risks in the investment managers portfolio should be given to the trustee in order for it to assess and manage climate change risks within the trustees whole portfolio,” he said.
Barnden discussed the legal precedent the REST case would likely set in a column for Top1000funds back in 2018.
Indeed, the precedent set by the REST case this week will likely be broad reaching, experts have noted.
“Funds will be careful… because they can expect that members will use REST’s commitments as a standard to measure them against,” Bland noted, adding that directors will also be considering their funds’ commitments as they are also potentially liable if the trustee doesn’t adequately consider the risks; the liability sits with the trustee and the director, he said.
Further, the REST case will lead to increased pressure for super funds to disclose their portfolio holdings and report in line with the TCFD recommendations, WTW’s James added.
With reporting by Tahn Sharpe