In the latest update by SC Noel Hutley and commercial barrister James Mack, the lawyers have advised members that superannuation funds must divest from assets with a high degree of climate risk or face breaching members’ best interest duties.
The pair noted super trustees are exposed to multiple climate change risks from economic consequences of failing to reach the Paris climate goals and regulators who are stepping up their efforts to police climate risk in the financial sector.
“Superannuation trustees should expect that regulators will exercise their enforcement powers consistently with their statements on climate change risk,” Mr Hutley and Mr Mack opined.
“Therefore, trustees should ensure they receive advice from asset consultants and other experts which is consistent with the reality of the financial risk posed by climate change. Superannuation trustees should ensure that they have the expertise to assess any advice and to mitigate any risks of climate change.”
Further, Mr Hutley and Mr Mack have recommended that super funds must consider divestment where climate risks are too great for a particular investment.
“Trustees should expect that, increasingly, every investment turn will require an engagement with the financial risk posed by climate change,” Mr Hutley and Mr Mack wrote.
“The engagement is also required by the law. If that engagement identifies a risk, the law also requires that a superannuation trustee manage that risk.”
The superannuation trustee duties update follows Rest Super’s setting on a landmark case that forced the super fund to recognise the financial effects of climate change when making investment decisions.
Following the ruling, Rest and several other superannuation funds have announced net zero timelines.
However, Market Forces warns 23 of Australia’s 300 biggest companies, as well as many more internationally, are pursuing plans consistent with the failure of the Paris Agreement, including the expansion of the fossil fuel sector. Almost every super fund in the country currently invests in some of these “out of line” companies.
“These out-of-line companies are driving increasing global warming, which increases physical climate risk across the entire economy. We also know the rapid decarbonisation required to meet the Paris climate goals means fossil fuel–producing and generating assets need to also decline rapidly,” Market Forces said.
“Yet fossil fuel companies are spending billions of dollars to massively expand coal, oil and gas production, significantly increasing their exposure to climate change transition risks, including stranded asset risk.”
Only a handful of super funds, such as Australian Ethical, Future Super, Cruelty Free Super and Verve Super, explicitly exclude investment in fossil fuels across their entire portfolios.
Ten of the largest 40 super funds have confirmed they have divested from companies whose main business is mining coal for power generation.
According to Market Forces, of the 15 biggest super funds in the country (by assets under management), 10 have taken no action to divest from or exclude any fossil fuel companies.
Sunsuper, Cbus and Rest have set targets to reduce portfolio emission to net zero by 2050, with Cbus also targeting a 45 percent reduction by 2030.