A lack of regulatory guidance and support on stewardship could be stopping more super funds from exercising their influence around ESG issues, an international study has found.  

Despite recent updates to climate-related risk-reporting rules, a research paper by UN-backed Principles for Responsible Investment (PRI) said one area Australian regulators still haven’t set clear expectations around is stewardship.  

The report received contributions from AustralianSuper chair Don Russell, Financial Services Council (FSC) chief executive Blake Briggs, industry funds-owned infrastructure vehicle IFM Investors, and international pension funds including CalPERS, although they were no quotes or ideas were specifically attributed to them. 

Compared to performance (which is heavily scrutinised), PRI said even at times when stewardship does get mentioned in a regulatory framework its presence is often “incidental” rather than intentional. 

For example, “APRA’s investment governance guidance explicitly allows super funds to exercise stewardship activities and sets expectations that they evidence how they use their influence to generate investment value”, the paper said. 

“However, neither the SIS Act nor APRA ‘recognise effective stewardship as a fundamental component of exercising trustee duties’.” 

More than 70 per cent of APRA-regulated super fund assets are now managed by funds that are signatories to an ESG protocol, that offer ESG investment options, or follow standard ESG practices, the PRI report stated, citing third-party research. 

But the report pointed out Australia does not yet have a regulator-backed stewardship code. And while proxy advisor Australian Council of Superannuation Investors (ACSI) and industry association Financial Services Council (FSC) have developed separate signatory-based codes and voluntary guidance, neither organisation explicitly sets expectations on how super funds should bridge their fiduciary duties and sustainability outcomes via stewardship practices, either. 

There is “a willingness among policymakers” to expand the framework, PRI said, but the nation’s current regulatory framework around promoting ESG outcomes is “incomplete”. 

“The existence of both guidance and a code covering different types of investors within the Australian market has contributed to variations in approaches to stewardship,” the report said.  

It outlined 10 priorities that a pension system needs to address if it wishes to further embed sustainability considerations. Apart from improving regulatory clarity around stewardship, the report also suggested that countries consider their market structure and investment practices.  

The report concluded that Australian super funds have the appropriate size and access to sustainable investment products, either via sophisticated in-house teams or external asset managers.  

As an open-ended defined contribution system, Australian funds are blessed with long-investment horizons and high contribution rates.  

However, there are restrictions, including that Australian funds’ liabilities are denominated in Australian dollars and their investment portfolios need to reflect that.  

“[Australian super funds] will inevitably invest in the Australian economy and therefore have a certain degree of exposure to the sectors and industries prevalent in the Australian market, including a significant proportion of oil, gas and mining companies where ESG risks and, in particular, climate risks may be present,” the paper said. 

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