ESG-driven superannuation collective the Future Group has called out the “mismatch” between the federal government’s renewable energy agenda and its treatment of sustainable investment in the Your Future Your Super performance test, as it uses Treasury’s review of the test to push for a system that would no longer “penalise” green assets. 

In its submission to Treasury’s consultation on YFYS test design options, the Future Group has called for a standalone benchmark to be introduced for “domestic, unlisted clean energy infrastructure asset class”.

The Future Group has $13.5 billion in funds under management across several sub-brands, including Future Super, Verve Super, Guild Super and corporate fund SmartMonday. The collective’s newly minted carbon advisory board chair, Jeremy Cooper*, says the ESG index updates are “absolutely key”. 

“There seems to be an enormous mismatch between where the government’s clearly heading with its renewable energy agenda and the performance test. Basically, one is pointing north and the other one’s pointing south,” he tells Investment Magazine.  

“Just today, in fact, [climate change and energy] minister Chris Brown announced an NSW tender under the Capacity Investment Scheme for six gigawatts of renewable energy – you would think that they want super funds participating in some way in those tender bids. 

“But for funds to be able to invest in exactly those sorts of renewable energy projects, that’s something where they’ve got to take tracking risk at the moment, and frankly it’s a pretty big disincentive for them.” 

Balancing act

While such an asset class may not yet have a 10-year performance history, the Future Group proposed using proxy returns  “for instance the 10-year Australian bond rate, plus an appropriate margin”  for the missing years.  

“This should create an incentive for funds to allocate capital to this asset class due to the tracking error benefit that should be realisable from such an approach,” the submission read.  

“As the missing years of performance history roll off, actual returns would replace them, meaning the incentive would have a natural time limit.” 

This submission also marked the carbon advisory board’s first public outing, Cooper says. The committee has yet to hold its first meeting, but he says its very existence is “groundbreaking” in the superannuation world. 

The committee’s establishment comes as ASIC is increasingly breathing down super funds’ necks on suspected greenwashing activities. If funds fail to back up their green product claims, such as committing to net zero pledges without a concrete roadmap, the corporate watchdog has warned that they could be flirting with misleading conduct.

Despite its ESG focus, Cooper says the Future Group has not yet committed to a net zero deadline.  

“[The group] wants to take a much more methodical and particular way of getting to that point,” he says.

 “The overall intent is to make sure that strategies and certainly public statements about what the Future Group will or won’t do vis-à-vis carbon emissions and so on is backed up by a very solid science and process.”
Cooper says the Future Group is supportive of the performance system overall and recognises its merits but says some nuance and flexibility in the regulator’s approach is needed.  

“There is a tension between things that are variously called in the nation building interest and in the individual member financial interests. This has to be very carefully balanced,” he says.  

Working with the system

Another major ESG-focused player is Australian Ethical. The firm runs both an APRA-regulated fund (which hit $8 billion in AUM in the March quarter) and several managed funds.

While it did not make a submission to the consultation, the firm’s superannuation chief executive Ross Piper says it supports any regulatory initiatives that will strengthen consumer comparability.

“Much has been written about the challenges of developing a perfect performance test and the related risks of herding or driving a short-term focus in investment decisions,” he tells Investment Magazine.

“Funds need to work very closely within the framework provided by YFYS, but we don’t think that is in any way inconsistent with who we are and how we operate.

“Whilst we think there is scope to strengthen certain elements of the performance and its application, we also don’t believe that this changes much for responsible investors.

“This would create the impression in the market that as a superannuation customer you need to sacrifice profits to invest in line with your values, and that’s not true. On the inaugural seven-year APRA performance test, we were second in the country.”

*Jeremy Cooper chairs the advisory board of the Conexus Institute, an independent think tank philanthropically funded by Conexus Financial, publisher of Investment Magazine. 

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