22 April 2021
Released today, a new legal opinion commissioned by Market Forces has confirmed super funds are legally required to understand and manage the material financial risks posed by climate change.
The new legal advice from barristers Noel Hutley SC and James Mack builds on a previous opinion they produced for Market Forces in 2017, which prompted Rest Super member Mark McVeigh to successfully sue the $55 billion fund over its approach to climate change action.
Some of the critical findings outlined in the legal opinion are:
- Super funds must take a thorough approach to understanding the financial risks posed by climate change, including obtaining regular expert advice;
- Where these risks are too great for a particular investment, funds must consider divestment – that is, shifting funds to less risky investments;
- Multiple studies have confirmed that failing to limit global warming in line with the Paris climate goals would have serious negative financial impacts across the economy broadly, and therefore super funds’ entire portfolios; and
- Target [investment] exposures, such as portfolio wide net zero emissions reduction targets, will need to be determined having regard to any financial risk posed by climate change.
Tell your super fund to get your retirement savings out of companies increasing climate risk by expanding fossil fuels.
Explainer – financial climate risks
According to the G20’s “Task Force on Climate-related Financial Disclosures (TCFD), the financial risks posed by climate change fall into two general categories:
- Transition risks – posed by changes in public policy, the disruption to the energy sector from technological change, changes in demand for certain commodities (coal, oil and gas, for example), the threat of litigation brought against organisations that have failed to address climate change, and reputation damage to organisations that inhibit the transition to a low-carbon economy.
- Physical risks – include the increased frequency and severity of extreme weather events, changed rainfall patterns, and the impacts of rising sea levels and sustained warmer temperatures.
What should our super funds be doing?
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. 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.
Based on the findings and evidence set out in the new legal opinion, super funds should be:
- Considering divestment from risky companies, such as those expanding fossil fuels, due to the increasing climate change-related physical and transition risks posed by their activities;
- Advocating for companies and governments to drive rapid decarbonisation to limit physical and transition risks facing the broader economy;
- Setting targets to rapidly reduce exposure to all fossil fuel sectors, as well as short, medium and long term targets to reduce portfolio emissions.
Where are they currently at?
Only a handful of ethical super funds – such as Australian Ethical, Future Super, Cruelty Free Super and Verve Super – exclude any investment in fossil fuels across the entire fund, which has them clearly leading the way on climate action. Some larger funds offer a fossil fuel free option, but this accounts for just a fraction of their funds under management, leaving the majority free to be invested in Out of Line companies.
10 of the largest 40 super funds have confirmed they have divested from companies whose main business is mining coal for power generation (known as thermal coal), such as Whitehaven Coal and New Hope Group. Aware Super, Hesta, UniSuper, Suncorp, NGS Super, Vision Super, Local Government Super, and Media Super all have policies to exclude such investments, while AustralianSuper and Commonwealth Super Corporation have confirmed divestment but not set exclusion policies.
Local Government and NGS also exclude investments in coal power generators like AGL, and Suncorp will do this by 2025. Aware Super has massively reduced the carbon footprint of its investments by selling shares in some of Australia’s dirtiest companies, including AGL and Origin.
Suncorp, which is mostly an insurer but also has a retail super fund, has announced a plan to phase down its investments in oil and gas production to zero by 2040. This policy will eventually see divestment from companies like Woodside, Santos and Origin Energy, whose oil and gas expansion plans are totally inconsistent with the climate goals of the Paris Agreement.
With far more work to be done to bring investments into line with the Paris climate goals, super funds are falling behind on climate action. And ‘falling behind’ isn’t where super funds want to be when it comes to managing climate risk – just ask Rest Super, which was sued over this very issue!
Of the 15 biggest super funds in the country (by assets under management), ten have taken no action to divest from or exclude any fossil fuel companies: Colonial First State, QSuper, MLC, BT Super, Sunsuper, AMP, Rest, Cbus and Hostplus. Sunsuper, Cbus and Rest have set targets to reduce portfolio emission to net zero by 2050, with Cbus also targeting a 45% reduction by 2030.
The information provided by Market Forces does not constitute financial advice. The information is presented in order to inform people motivated by environmental concerns and take actions based on those concerns. Market Forces is organising data for environmental ends.
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