Taking a passive stance on climate change isn’t something Australia’s A$2.9tn ($2tn) pension industry can get away with for much longer.
After deadly wildfires razed an area the size of England, custodians of the nation’s retirement savings are being asked to take more direct steps to combat global warming.
Environmental activists and funds’ own members say the common practice of staying invested in the biggest polluters to exert influence isn’t sufficient, putting firms under mounting pressure to either divest or significantly cut exposure to offending companies.
Outside of Australia, change is happening faster. BlackRock Inc last month said it would exit debt and equity investments in thermal coal producers across its active portfolios. Europe’s largest pension fund Stichting Pensioenfonds ABP last week pledged that its investments would be climate neutral by 2050, while UK’s Brunel Pension Partnership in January threatened to fire managers that fail to curb exposure to climate change and position for a low-carbon economy.
Smoke envelops Bredbo, Australia, on February 1.
“We’ve seen a spike in Australians connecting the bushfires to climate change, and then to how they’re investing their money,” said Simon O’Connor, chief executive officer of the Responsible Investment Association Australasia. “The onus is on funds to set really strong, quantifiable targets and then demonstrate they’re moving in the direction of meeting those targets.”
The world’s fourth-largest pension pool has to date resisted meaningful change. While funds pepper their corporate reports with sections on environmental, social and governance practices and appoint ESG heads, they’ve steadfastly held onto positions in climate-change offenders, like Glencore Plcand Whitehaven Coal Ltd.
The belief is that by staying invested, funds can pressure companies to start changing their practices. There’s also always the threat of voting against company directors at annual meetings if progress isn’t made. That’s an approach Boston-based money manager State Street Corp has adopted, recommending board members of firms that have been “consistently under-performing” peers in the asset manager’s ESG scoring system not be reinstated.
State Street has also taken aim at activist shareholders that create confusion for investors without tackling material issues for long-term stakeholders, a sentiment Australia’s pension funds share.
But in Australia, funds’ environmental local voting record is poor, according to international corporate governance specialists Proxy Insight.
Among asset managers with at least $10bn under management, only VicSuper supported all climate-change resolutions during the 2018-19 annual meeting season. Funds including IOOF Holdings Ltd, UniSuper, Retail Employees Superannuation Trust and Equipsuper failed to vote for any resolutions while those including AMP Ltd, First State Super and Sunsuper supported 50% or less.
“Pension funds have been telling us for years they’ve been engaging with investee companies to improve their climate performance,” said William van de Pol, a Melbourne-based asset-management campaigner at environmental lobby group Market Forces. “But we haven’t seen that translate into any strategic shifts that would suggest the major contributors to climate change are actually changing their business models.”
The pressure on pension funds to take more decisive action is mounting. Around 80% of Australians are worried about climate change, with the recent bushfire crisis intensifying concerns, a study last month of 1,033 people by The Australia Institute found.
Retail Employees Superannuation Trust, a fund for retail workers that manages around A$60bn, is being sued by one of its own members for not adequately assessing the impact of climate change on its holdings. And some 8,100 members of UniSuper, which manages A$85bn, signed an open letter in January demanding the Melbourne-based fund scrap investments in firms that are expanding their fossil fuel output.
UniSuper said it is actively responding to all member inquiries and reminding them that “we have seven fossil fuel-free options that they can chose from, across the risk spectrum.”
“While we now have over A$7bn in our sustainable options, this represents just over 12% of member choice funds, excluding the defined benefit,” UniSuper said in an emailed statement. “This suggests to us that for most members, they’re either comfortable with our approach and/or they’re uncomfortable with losing out on potential upside by restricting their investment universe.”
The broader finance industry isn’t immune either. Last month, a group of bushfire survivors banded with environment group Friends of the Earth in a legal claim against Australia & New Zealand Banking Group Ltd, accusing the lender of financing the climate crisis through funding for fossil fuel projects, local media reported.
To be sure, pension funds have made some inroads.
BHP Group has pledged to power two of its copper mines in Chile via renewable energy by the middle of the decade as it succumbs to pressure from funds to improve its environmental record. It’s also said to be moving ahead with plans to exit thermal coal production.
Origin Energy Ltd has spent more than A$800mn in order to source more than one-quarter of its energy-generation mix from renewable energy this year, company disclosures show.
AGL Ltd, the nation’s largest owner of coal-fired electricity assets, has created an up to A$3bn fund to unlock investment in large-scale renewable energy in partnership with Queensland Investment Corp on behalf of its clients, including Australia’s Future Fund.
The legal requirement for many of Australia’s pension funds to return 3.5% above inflation over a decade is an added complication. Money managers must look after members’ best financial interests and excluding a whole segment of an economy where returns may still be robust can present a challenge.
For example, while BHP and Rio Tinto Group are among the developed world’s most-polluting energy and mining companies when emissions from their customers are taken into account, they’re also among the most profitable, data compiled by Bloomberg show.
“It’s easy to have a slogan,” said Raphael Arndt, the Future Fund’s chief investment officer. “But if someone says ‘Get rid of fossil fuel companies,’ do I sell AGL? That’s also my biggest exposure to renewables.”
Still, funds shouldn’t expect the pressure to let off.
“The presence of natural disasters like bushfires has put sustainability in the spotlight,” said Jessica Melville, the head of strategic advisory, investments for Willis Towers Watson. “We expect this to grow in importance with a significant reallocation of capital likely over the next decade, especially with respect to climate change.”
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