Landmark court actions, the Paris Agreement of 2015, and other commitments by large institutional investors are leading to a kind of “race to the top”, according to David Barnden, principle lawyer at Equity Generation Lawyers, and gone are the days when funds pushed back by labelling climate risk an ESG issue but not a core financial consideration.
But it is still unclear how funds’ commitments will flow through to investment managers, Barnden said in a podcast discussion with Liza McDonald, Head of Responsible Investing at Aware Super, hosted by Investment Magazine in partnership with AIA Australia.
“Often there’s pushback around funds just wanting to let their investment managers do what they do, and not hassle them,” Barnden said. “So there’s still a lot of work to be done.”
Barnden is well known for bringing a landmark case against Rest Super over its climate change disclosures on behalf of 25-year-old Mark McVeigh. The settlement included a commitment to publish all portfolio holdings and align investments with a net zero emissions target by 2050.
He is also representing eight students in the Federal Court of Melbourne, arguing the Minister for Environment owes them a duty of care to protect them from the future harms of climate change, targeting coal mine expansions.
He is now targeting the Australian government over climate risk disclosure regarding Australian sovereign bonds, seeking that the government disclose to investors the impact climate change will have on things like GDP, productivity and taxable income streams.
Leading from the front
He said members should be at the forefront of pushing better ESG practices, and court cases such as those he is involved in were examples of how members can lead from the front.
“We do see people of all ages pushing funds, pushing banks, pushing insurers, to get on board and to be a part of a hasty transition,” Barnden said. “In many ways, I’m not sure if it’s appropriate for the key position of a fund or bank to be educating their consumers or shareholders or members.”
But Liza McDonald, said she disagreed with Barnden’s belief that it isn’t a fund’s role to educate its members, arguing funds need to push back against misinformation.
Aware Super’s predecessor, First State Super, signed up to the global Principles for Responsible Investment in 2008 and was recognised by the PRI as one of the leading global responsible investors. When Aware released its Climate Change Portfolio Transition Plan, a lot of members were supportive but others were unhappy with the position Aware had taken, she said.
“So it is a balancing act, in terms of representing all of your members,” McDonald said. “But still, you know, from a trustee perspective, it is in the best financial interest of our members to consider this risk… and how it does come through in our investment decision making.”
There is a lot more funds can do in communicating how they’re going about this, she said. McDonald will feature on a panel at the upcoming Fund Executives Association Limited (FEAL) annual conference on August 5 on a panel session entitled Positive Engagement.
Aware has more than 120 external fund managers appointed across all different asset classes and goes through a due diligence process that looks at how they integrate ESG principles. Podcast host Matthew Smith, Managing Editor at Conexus Financial, asked McDonald if Aware had awarded or taken away mandates on the basis of its responsible investing guidelines or principles.
McDonald said the fund preferred to work with managers to close gaps. “If we don’t give them the opportunity and we don’t work with them in terms of what we want to see, then we’re never going to get it to being mainstream.”
First State did terminate mandates in 2012 after receiving pushback over its decision to divest from tobacco, she said. But divesting from thermal coal last year was not controversial at all with the fund’s managers.
The federal government still has “a long way to go” despite “a few positives” in the budget, she said, and had a greater role to play in providing more policy direction supporting investments in renewables in Australia.