“One of the issues in the definition of best financial interests is timeframes – is it 3 years, 5 years, ‘long-term’? This is particularly important when deciding what to do about stranded assets and about issues that we know are important in the long-term but have relatively little effect on short-term financial performance.”

Danielle Press (CEO, Equipsuper)

Drivers for Action

Asset owners are paying increasing attention to ESG issues in their investment processes and in their dialogue with companies. The reasons include:

  • The establishment of the Australian Council of Superannuation Investors (ACSI) by a number of superannuation funds and industry bodies to develop guidelines for superannuation funds on ESG issues and to establish corporate governance principles for Australian-listed companies.
  • The Establishment of the ASX Corporate Governance Council.
  • The Financial Service Council’s (FSC) standards on voting disclosure and ESG risk reporting.
  • Guidance from bodies such as the Australian Institute of Superannuation Trustees on the integration of ESG issues into decision-making.
  • NGO campaigns on specific issues, with a number of these (e.g. on stranded assets) raising significant investment concerns, which are increasingly being echoed by leading Australian brokers, consultants and advisors (such as Citi, HSBC and Mercer).
  • The likelihood that the industry will face increased demands for transparency (e.g. in relation to fund holdings).
  • Industry competition for members with responsible investment being a potential point of differentiation. • Growing consumer interest in ethical and green funds.
  • Growing recognition by fund managers that ESG issues – in particular, governance issues – are important and need to be accounted for in investment decision-making.
  • Growing recognition that responsible investment may enable above benchmark returns to be achieved.

Barriers to Progress

Interviewees identified a number of reasons why trustees do not account for ESG issues in their investment practices and processes:

  • Entrenched short-termism, driven by factors such as fund manager remuneration structures and performance/reporting cycles.
  • Ambiguous legal rules, in particular the absence of case law on the extent to which the duty to maximise benefits for beneficiaries may be viewed as inconsistent with ESG investment, and on the practical import of the heightened standard of trustee due diligence.
  • The limited guidance from APRA on how responsible investment should be applied in practice, raising concerns that responsible investment may run counter to trustees’ fiduciary duties.
  • Historical trust instruments. The fact that the trust deeds of many of the large investment funds in Australia were settled at least 20 years ago and do not contemplate ESG investment is seen as increasing the risk for funds that they may not have the legal power to make ESG investments.
  • The need for liquidity, diversification and dividend yield, which has, historically, been a very important argument for investing in the resources and energy sector. This is compounded by a commonly held view that responsible investment is the same as negative screening.

Recommendations

In addition to the global recommendations, we recommend that:

Australian Prudential Regulation Authority (APRA)

The Australian Prudential Regulation Authority (APRA) should clarify that fiduciary duty requires asset owners to pay attention to long-term factors (including ESG factors) in their decision-making, and in the decision-making of their agents.

Regulators

Australian regulators should clarify that responsible investment includes ESG integration, engagement, voting and public policy engagement.

Read Fiduciary duty in the 21st century: Australia roadmap

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