Climate Change, Superannuation and Millennials

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This month the UN Intergovernmental Panel on Climate Change released its much-anticipated report on global warming targets. The report predicts that current rates of emissions will cause an increase in temperature of more than 1.5 degrees Celsius by 2040, and 2 degrees Celsius by 2060. Authored by more than 90 scientists, it warned that significant and rapid changes would need to be enacted between now and 2030 to stave off global catastrophe, advocating for an urgent drop of coal usage to between zero and 2%[1].

Only a day after the release of the report, the Australian government responded that it would not phase out the use of coal-fired power which generated 62% of the country’s electricity in 2016-17. The Government justified this decision by stating it would keep electricity prices affordable for individuals and small businesses. Previously touting that the country’s emissions targets would be met ‘in a canter’, research by the Climate Action Tracker, the Grattan Institute and University of NSW all separately suggest that Australia will fall well below its agreed reductions without changing the policy setting[2].

As Australian investors once again try to grapple with the effects of this impasse between global and national climate change (in)action, the Future Business Generation – a millennial-driven platform of the Future Business Council – foresaw the opportunity to start their own conversation with Australian superannuation funds.

The initiative’s Climate Change, Superannuation and Millennials report was launched on the 3rd of October in Melbourne. The report, developed with input from a range of relevant stakeholders including AustralianSuper, UniSuper, Market Forces, Local Government Super, HESTA, Australian Ethical Investment and Future Super, reflects the minimum best practice standards of climate change risk integration expected of superannuation funds by millennials. This includes disclosing evidence of portfolio-wide risk assessment using climate scenarios across asset classes and sectors, engagement reporting, and meaningful oversight of asset managers’ integration of climate risks.

CAER discussed the report with its lead author, Oshadee Siyaguna of the Sustainable Business Council.

 

CAER: What has been the reception to the Climate Change, Superannuation & Millennials report?

Oshadee: From the beginning our whole idea was to be constructive. There are a number of groups that are pushing for more disclosure and risk management on climate change, and most of them have – in our view – taken somewhat of a disruptive approach. Each approach has its pros and cons, but we went and spoke to most of the superfunds before the report and our intention was to present our perspective to these funds.

Both during and after the report, we have had a few superfunds come back to us with what they are planning on disclosing, for example regarding the TCFD (Task-force on Climate-related Financial Disclosures) or climate disclosure more generally. While it is not our mandate to assess their disclosures, we will be providing broad feedback to those that have asked. More surprisingly, we’ve had some listed companies come to us for feedback even though they were never in the report.

We haven’t had any negative feedback so far. As far as our engagement with funds, we expect that material risks like climate change should be looked at regardless of whether a fund’s membership is asking for it. It is part of fiduciary responsibility, not a marketing campaign to recruit more millennials. We are seeing more sophisticated investors undertaking complex analysis in this area, and we expect that investors must commit to a transition pathway to support a two-degree target.


C: Will there be a follow-up assessment of funds against the minimum disclosure requirements set by the report?

O: We are exploring working on how we might construct a framework to identify which superfunds are keeping to the minimum standards. The larger idea is to find a way that will make it easier for millennials – and everyone else – to identify which superfunds are doing what. The intention here isn’t to name and shame, but highlight who is doing well. Ideally we would do something similar to a TCFD benchmarking exercise. Our recommendations are largely consistent with the TCFD, and while there are differences in small details, we are aligned from a principles perspective.

 

C: How do you see this report in the context of broader economic initiatives on climate change action?

O: There are so many ways it could go. It is a very crowded space, especially right now, and more conversations need to be had to ensure we are not just duplicating something that is already out there. Once you bring in standards/compliance it becomes onerous on superfunds to keep track of these things, so we need to be pragmatic. I’m not aware of anyone doing TCFD benchmarking for superfunds. If we find someone better placed than us to undertake this, we won’t do this. Otherwise, we want to keep providing a platform for millennials to voice their concerns and possible consider other options, such as forming an index of funds that fulfil minimum compliance, or something similarly as unique that could be of assistance.

 

C: What is your perspective regarding the more activist approaches to advocating for climate change disclosure in investment?

O: We are asking superfunds to consider climate risks and have risk management plans that address those risks and address the broader risks they face as a universal owner, and then to tell that story to their beneficiaries so that they’re confident that the fund is doing something about it. To me, that covers the gamut of things that everyone else – including the more activist campaigns – are asking for in different ways.

There are multiple views on whether the activist or constructivist approach works best. At the end of the day, when an ‘activist’ is on one side asking for something extreme, the more constructive side immediately becomes more moderate. They occur on a spectrum. It might be useful, but in certain cases, activist approaches are perceived as so demanding that they start to lose their value – it’s a tricky balance to strike.

What’s interesting about this dichotomy in this particular industry is that the approaches are still evolving, so it is yet to be seen how far each one can go. There is space for everyone to be out there and for everyone to be making demands. The question is who will investors listen to? It comes down to how salient you are, how legitimate you are. It is a power situation.

From a Future Business Generation perspective, we want to provide evidence-based platform for those questions to be asked.

 

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The Climate Change, Superannuation and Millennials report can be downloaded here.

Interested in discussing this issue further? Feel free to get in touch.

 

References

[1] https://www.abc.net.au/news/science/2018-10-08/ipcc-climate-change-report/10348720

[2] https://www.theguardian.com/australia-news/2018/oct/11/in-a-canter-climate-experts-say-australia-will-not-meet-emissions-targets

Nithya Iyer

Author: Nithya Iyer