Aussie super funds get heat over climate change stance

The bushfires that devastated huge swaths of Australia over the past six months have left the engagement policies at the center of the superannuation industry's efforts to address climate change risks under growing scrutiny.

The country's recent environmental disaster "put climate concerns front and center in people's minds," and one result has been greater pressure on super funds to explain why they choose to engage with portfolio companies seen as contributing to global warming rather than divest them, said Helga Birgden, Mercer's Melbourne-based global business leader, responsible investment.

The biggest fundamental change since the bushfires is the number of beneficiaries taking an active interest now in how their super funds are managing climate change risk and which fossil-fuel companies they have exposure to, agreed Simon O'Connor, Melbourne-based CEO of the Responsible Investment Association Australasia.

One example: web traffic in RIAA's online tools that help "consumers connect with funds that match their interests" doubled in January from December, an increase of thousands, Mr. O'Connor said.

Over the past month, two big Melbourne-based funds, UniSuper, a A$80 billion ($53 billion) industry fund serving the higher education and research sectors, and HESTA, a A$56 billion fund focused on health-care employees, have come under pressure from segments of their membership to expunge fossil-fuel companies from their portfolios.

Spokesmen for UniSuper and HESTA declined to comment.

Both campaigns were backed by Market Forces, a Melbourne-based affiliate of environmental activist group Friends of the Earth Australia launched in January 2013.

Julien Vincent, executive director of Market Forces, said his organization has been calling on super funds to divest pure-play fossil-fuel companies for five years now but the "heightened sense of awareness" spawned by Australia's recent cataclysmic weather events is resulting in more activism this year, with climate researchers and health-care workers at funds like UniSuper and HESTA leading the way.

Calls for wholesale divestment of fossil-fuel holdings from portfolios would hark back to an earlier period when responsible investment was a small market niche. It was the idea of engagement — that investors could do well by actively engaging with companies to create shareholder value — that helped move responsible investment into the mainstream over the past decade.

But especially at a time like the one Australia just lived through, with climate risk taking a destructive, deadly and continent-spanning turn, that approach can pose public relations challenges for super funds.

"The fundamentals of the issue haven't changed but the salience has," said Gabriel Wilson-Otto, Hong Kong-based head of stewardship, Asia, with BNP Paribas Asset Management. In the current environment, it becomes more political to not act aggressively and possibly harder for a "slower engagement transition policy to get public support," he said.

In a system that's compulsory but allows consumers to freely choose which fund should invest their assets, moving from one to another "in a day," the bonafides of these funds on the topic of climate change is becoming really important from a consumer-choice perspective, Mr. O'Connor said.

But proving the value of engagement — which by its nature involves incremental change — isn't straightforward, especially when compared with the "clear, bright line" of divestment, said Jenn-Hui Tan, Singapore-based global head of stewardship and sustainable investing at Fidelity International.

That may be one reason "exclusion has sort of come back to the forefront of people's thinking," he said.

Meanwhile, heightened interest in climate change from participants now is pressuring funds to get better at communicating with regard to the actions they're taking and the results they're getting, Mr. O'Connor said.

Kim Farrant, who in February joined Hostplus, the A$53 billion Melbourne-based industry fund for the tourism, hospitality and sports sectors, said one factor behind Hostplus' decision to establish the new role of head of ESG she took on was a recognition that the super fund's participants want "to know more about how engagement delivers outcomes."

Hostplus' efforts in areas such as climate change take place "behind closed doors," but the company is positioning itself to communicate more with participants to make the case that "engagement can be a very effective tool in creating change," she said, citing Rio Tinto PLC, the London-based Anglo-Australian metals and mining giant, as an example of a company moving in the right direction against the backdrop of "ongoing engagement."

Rio Tinto, on Feb. 26, announced it will invest roughly $1 billion over the coming five years to support the company's efforts to meet new climate change targets, including a 30% cut in its emissions intensity by 2030 from 2018 levels.

In any event, engagement and exclusion should be seen as complementary tools rather than as a binary choice, said Fidelity's Mr. Tan. "If you don't see the kind of change that you think needs to happen, then the answer ought to be some kind of divestment," he said.

On that score, Market Forces' Mr. Vincent said Australia's institutional investors have been found wanting. "It's hard to think about a group of people who are more asleep at the wheel" than the country's superannuation funds, he said.

There's a place for engagement but it needs to have an effect, it needs to matter, Mr. Vincent said. Instead "we see a lack of evidence that engagement is getting anywhere," he said.

"You see investors who say they're going to engage routinely voting against things like shareholder proposals for greater risk exposure or climate change management," and in the end they keep companies in their portfolios whose businesses are predicated on not meeting the Paris Agreement goal of limiting the rise in temperatures from preindustrial levels to between 1.5 and 2 degrees Celsius, said Mr. Vincent.

Mercer's Ms. Birgden said some funds appear to be taking steps now in the direction of Mr. Vincent's more results-oriented vision, setting tighter timetables and establishing clearer metrics for progress.

Liza McDonald, head of responsible investment with First State Super, a Sydney-based A$105 billion fund, said shifts in climate risks over the past four years or so, together with "rising member expectations on how we are responding to climate change," has led First Super to review its approach to ensure it is still managing its portfolio to stay within the Paris Agreement's less than 2-degree temperature increase ceiling.

In coming weeks, First State will announce an update — its Climate Change Portfolio Transition Plan — which will "establish our approach to tackling the risks and opportunities relating to climate change, including setting measurable targets in relation to this," she said in an email.

At the end of the day, asset owners and money managers say wholesale divestment of sectors like coal is unlikely to achieve the goals climate activists are seeking.

"Divestment doesn't represent a silver bullet," Hostplus' Ms. Farrant said. If a boycott causes a company's valuation to fall sharply, odds are it will shift into the hands of private equity investors, a sector with less transparency and potentially less interest in engagement on climate-related issues, she said.

"There's going to be a price that you pay for any asset that has an economic return attached to it," Fidelity's Mr. Tan agreed. "We know we have to reduce our usage" of thermal coal, and rapidly, but there'll continue to be demand for coal as a source of electric power and as long as coal generates returns, it will command a price that someone is willing to pay, he said.

Market Forces' Mr. Vincent said he's willing to give wholesale divestment a try. Even if the targeted fossil-fuel companies managed to survive, at the least it would allow millions of superannuation participants unhappy with backing companies driving "runaway climate change" to have "slightly cleaner consciences and slightly cleaner portfolios."