Australia's retirement fund giants tell companies to act on climate, social change

Australia's state run retirement plans are throwing off their reputation as passive investors.

They're making governance and environment and social responsibility part of their mantra, pushing for a ban on single-use plastic bags at supermarkets, lobbying miners to take action on climate change and demanding companies hire more female directors. The super industry in Australia is growing exponentially, almost tripling over the past decade and expected to top A$5.4 trillion ($3.8 trillion) by 2029, and funds have been buoyed by recent ESG wins.

"Australian superannuation funds are sensible, and they use their power wisely," said Fiona Reynolds, the London-based CEO of Principles for Responsible Investment, a UN-backed organization representing $82 trillion in assets under management. "I don't think they abuse it."

The conversations taking place between big business and money managers estimated to own an average of around 14% of every S&P/ASX 200 listed company is in contrast to the ruling Liberal Party's stance. Prime Minister Scott Morrison hasn't made climate change a top priority in the lead up to this month's federal election, angering voters. An Organization for Economic Cooperation and Development report in January slammed Australia's efforts to fight climate change, noting that environmental issues have been a catalyst for political instability.

"In some cases it's because of government inaction on issues like climate change that investors and business have had to get on with things themselves," Ms. Reynolds said. "Even business in Australia is crying out for better climate policy."

AustralianSuper was part of a global lobbying effort that prompted Rio Tinto Group to assess and report the potential risks and opportunities of climate change. The mining giant said last month it would walk away from industry lobby groups that clash with its views on coal.

Super funds had another victory in February when, as part of engagement through the Climate Action 100 Plus, Glencore pledged to limit coal production and align its business with the Paris Agreement. It was a surprising about-face from a company that's spoken glowingly of coal in the past and snapped up big Australian coal mines from rivals exiting the industry.

The increasing importance that Australia's super funds are placing on ESG mirrors a global shift. Norway's colossal wealth fund in March said it would dump about $7.5 billion of shares in oil and gas production and exploration companies, while Government Pension Investment Fund in Japan — the world's largest — requires asset managers to integrate ESG into investment analysis. Even hedge funds, which have at their core the ability to make unconstrained investment decisions, can't escape the change in sentiment.

"Many boards find it refreshing to talk to people who have an interest in longer-term issues rather than short-term share price," said Louise Davidson, CEO of the Australian Council of Superannuation Investors, a body that represents asset owners and institutional investors including AustralianSuper and First State Super. "Companies actually welcome that dialogue."

There's still more to do, however. Louise Lew, the head of sustainable investment for Willis Towers Watson in Australia, said Europe leads in a number of areas. "There's been a big push in Europe in terms of regulation that has shifted the whole industry ahead, whereas we're not seeing that to the same extent here."