In early November, superannuation fund Rest and 25-year-old member Mark McVeigh agreed to settle McVeigh’s case against Rest related to handling of climate change risk. McVeigh’s claims included that the trustee of Rest had breached its duty to exercise the care, skill, and diligence required of a professional superannuation fund trustee in failing to identify and manage climate related risks to the fund’s investments. He also claimed that the failure to identify and manage climate related risks was a breach of the trustee’s duty to protect the best financial interests of beneficiaries. This litigation and settled outcome is significant, not only to Australian superannuation fund trustees, but to fiduciary investors with long term investment horizons globally.

According to a statement from Rest, the superannuation trustee has agreed that “[c]limate change is a material, direct and current financial risk to the superannuation fund across many risk categories.” Amongst other things Rest also agreed to “continue to develop the systems, policies and processes to ensure that financial risks of climate change are: identified and, to the extent possible, quantified in respect of both individual assets and the fund’s portfolio as a whole; considered in the context of the fund’s investment strategy and asset allocation mix … and otherwise appropriately mitigated and managed.”

Rest has agreed to disclose to its members physical and transitional climate change related risk exposures and “the systems, policies and procedures maintained by the trustee to address those risks,” including “reporting outcomes on its climate related progress and actions in line with the recommendations of the TCFD [Task Force on Climate-related Financial Disclosure].”

What does this mean for other superannuation trustees?

While the case did not result in a binding legal precedent on whether the standard of care owed by trustees in relation to investments specifically includes climate related risks, superannuation trustees are likely to feel the pressure to align their approach to ESG risks with that agreed by Rest, particularly where there is evidence that the risks are financially material to the fund’s investments.

The approach agreed by Rest is consistent with that already being taken by a growing cohort of large superannuation funds. A recent report published by ClimateWorks Australia in conjunction with the Monash Sustainable Development Institute analysed the largest Registrable Superannuation Entity Licensees and found that “efforts by Australian superannuation funds to address climate change risks are accelerating” – “20 per cent of superfunds … have targets, or have expressed an aspiration to achieve net zero emissions by 2050 for their investment portfolio,” and “60 per cent … are engaged in a range of activities to reduce portfolio emissions intensity, but […] are not yet aligned with net zero by 2050.” Australian Super in making its commitment to achieve net zero carbon emissions by 2050, recognised that it is “in members’ best interests given the risk climate change presents to the Fund’s long-term investment performance.”

It is important for all trustees to now give consideration to whether they should be identifying climate related risks as part of their risk management strategy, especially where material. As these approaches become broadly adapted as standard industry practice, it becomes more and more likely that in the event claims similar to those of McVeigh come before a court, the court will look to those practices to inform determining the standard of care of a professional superannuation trustee.

There may also be important disclosure considerations for trustees. The McVeigh case started as an access to information claim, arguing that Rest had an obligation to provide its members with information concerning its knowledge of climate change risks, its opinions on those risks, and actions for responding to those risks.

Like the transition of the superannuation industry to increasingly address climate change risk, a move towards more transparency on holdings and enhanced disclosure around assessment and progress related to climate change is evident. Australian Super published a report in line with the TCFD frameworks, detailing its governance, strategy, risk management and metrics in relation to climate change, Aware Super has made its Climate Change Portfolio Transition Plan readily available, and Cbus discloses how it is measuring and reporting metrics and targets in its Responsible Investment supplement to its Annual Report, to name a few.

We are seeing an increasing expectation from beneficiaries that superannuation funds are managed responsibly and ethically through proactive assessment and management, including development of sustainable investment strategies and active ownership, exercising voting rights and engaging with companies they invest in, and considering how risks to assets are best addressed, including insurance against physical risks to directly held real estate assets. This indicates that it might be worth considering the extent to which other ESG related risks warrant identification and management by superannuation trustees.

Regulatory Guidance

In February 2020, APRA wrote to all APRA-regulated entities highlighting it intends to update Prudential Practice Guide SPG 530 Investment Governance to assist superannuation licensees in complying with requirements in relation to formulation and implementation of invest strategy, including ESG considerations and develop and consult on a climate change financial risk prudential practice guide. APRA also encouraged adoption of voluntary frameworks to assist with the assessment, management and disclosure of climate change risks, such as the TCFD.

This comes after ASIC published updates to clarify the application of existing regulatory guidance (primarily related to publicly listed entities). The guidance suggests disclosure of climate change related risks and opportunities, including highlighting climate change as a systemic risk that could impact an entity’s financial prospects for future years and that may need to be disclosed in an operating and financial review and strong encouragement for listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.

A global shift

The shift towards enhanced assessment and disclosure is not novel, as progressively over the last few years, there has been a global shift in the financial services industry towards responsible investment and enhanced disclosure. In 2018, legislation was passed in the United States, requiring one of the nation’s largest public pension funds to “publicly report on its analysis of the climate-related financial risk of its public market portfolio, including the alignment of the fund with the Paris climate agreement and California climate policy goals and the exposure of the fund to long-term risks.” Similarly, in August this year, the UK Department for Work and Pensions sought views on policy proposals to requires trustees of larger occupation pension schemes to address climate changes risks and opportunities and make available as part of their Annual report a full TCFD report.

With no binding precedent or binding and specific requirements from regulators, superannuation trustees will have to consider for themselves what is in the best interests of members and their obligation to develop and review an investment strategy that considers the risks of macro themes such as climate change to long term investment performance.

Trustees should remain aware of the risks associated with failing to consider ESG risks and their long-term impact on investments, as the risk of similar litigation being brought is a reality (that is if the regulators do not act first to mandate assessment and disclosure).

This contribution was co-written with Gabriela Pirana, QMV Legal’s senior associate.

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