Climate Change: Managing the risks and regulation facing Australian Superannuation Funds

As the UN Climate Change Conference (COP26) draws to a close in Glasgow, superannuation funds in Australia are considering how to manage the complex financial risks associated with climate change, and how to comply with increasing regulatory scrutiny of their actions.

Funds take climate change action

While COP26 sought to encourage countries to make ambitious 2030 emission reduction targets that align with reaching net zero by the middle of the century, many superannuation funds in Australia have already sought to lead the way and have put in place portfolio net zero targets.

In October 2021, the Association of Superannuation Funds of Australia (AFSA) released a discussion paper calling out the risks of climate change and the impact it is expected to have on the investment portfolio performance of superannuation funds. AFSA is exploring the possibility of all superannuation funds committing to:

1. Reach net zero greenhouse gas emission in their investment portfolio by 2050; 
2. Engage with investment businesses on climate change risk to support them on their journey to mitigate climate change risk; and
3. Adopt the Principles of Responsible Investment approach.

A number of superannuation funds are also starting to actively factor in climate change initiatives to their investment strategy. Take UniSuper for example which is embedding decarbonisation as a core investment theme across its portfolios. The fund is targeting net zero emissions for its direct property and infrastructure portfolio by 2030 and publishes an annual report titled “Climate risks and our investments” which sets out its progress against its climate targets.

Duties of trustees

Whatever position funds decide to adopt, trustees of superannuation funds need to balance their duty to consider the financial risks of climate change on their investment strategies, with their duty to comply with the ‘sole purpose test’ set out in the Superannuation Industry (Supervision) Act 1993.

The sole purpose test sets out that trustees are to ensure that they maintain the fund solely for one or more of a set of specified core purposes, being the provision of benefits upon the retirement or passing of a member and/or core and ancillary purposes which include ill health and termination of employment.

Wherever funds fall on the spectrum of adopting portfolio emission reduction targets, trustees will need to consider how climate change risks could impact their investment strategy, but also how any action to address climate change risk may impact the sole purpose of maintaining the fund. A continuing theme being raised by regulators is that consideration of the risk that climate change presents is essential as it can have a measurable impact on portfolio performance.

Regulatory approach

Superannuation funds are also under pressure to manage the financial risk associated with climate change risk, consistent with the guidance issued by the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

Last week, APRA and the Reserve Bank of Australia (RBA) released a joint statement on the efforts they are taking to address climate change financial risk.  In line with other members of the Network for Greening the Financial System (NFGFS). The statement sets out that:

“APRA considers that effective decision-making by financial institutions needs to include a full consideration of risk, including the potential impacts of physical, transition and liability climate risks.”

APRA’s draft practice guidance on Climate Change Financial Risks (CPG299) is expected to be finalised before the end of 2021. This will provide superannuation funds with additional guidance on  prudent practice in the management of financial risks arising from climate change, including with respect to governance, risk management, scenario analysis and disclosure.

It is important for superannuation funds to consider and monitor regulators’ comments and requirements on climate change related risks. Clyde & Co remains committed to mapping and understanding climate change risk alongside a growing network of cross-sector experts and collaborators, to help our clients navigate the rapidly evolving risk landscape they face. If you would like to discuss the issues raised and how your fund may best reconcile the risks and opportunities presented by climate change, please contact Avryl Lattin and/or Casey Majchrzak.