The RIAA Superfund Benchmark Report for 2018 shows an array of developments in Responsible Investment (RI) integration across Australia’s biggest superannuation funds. CAER is proud to be the key researcher involved in analysis for this major report. The results raise interesting questions about how this research should continue into the future, and what considerations need to be made in a fast maturing RI investment market.
As the report notes, there has been an overall increase in many areas of RI integration across superannuation funds:
- 81% of funds now formally commit to RI,
- more than 60% implement negative screening, and
- almost half of all funds offer RI options.
Some funds were able to provide an impressive level of detail regarding integration of RI across internal governance mechanisms. Similarly, an increased level of sophistication was demonstrated by several funds in relation to RI safeguards across investment managers and asset consultant. These trends suggest an increasing level of maturity across the RI market. However, with this maturity comes greater responsibility and a need to rethink what accountability looks like. Stakeholder groups are increasing pressure and mandatory disclosures on climate change strategies are fast approaching. Are we ready? What can we do to up our game?
Learning to ‘walk the talk’?
Fund policies and explanatory statements on particular RI issues often demonstrate awareness of issues at fund-wide level. The relationship of such statements to internal governance mechanisms, as opposed to marketing and communications documents, needs to be clarified. In many cases, funds were able to demonstrate awareness regarding RI issues without this translating to actions within the fund. Soft commitments made in website discussions often could not be mapped to concrete outcomes. Although there was definite reduction in ‘smoke and mirrors’ strategies, this remains a space for ongoing development.
Related to this point, is the need for funds to develop and measure themselves against their own progress. With a majority of RI committed funds unable to identify targets for RI performance (75%), fund beliefs on RI become unaccounted for in operations and implementation. Many funds reported the challenges of setting RI targets, but some simple ways to approach this included measuring the following items against a target:
- carbon footprint of portfolios reported year-on-year with % reduction outcomes
- proportion of successful integrated ESG or RI approaches across particular asset classes
- commitments to vote 100% of holdings
- commitments to engage across a given proportion of companies.
More developed RI funds had devised internal systems including qualitative and quantitative methods as mapped against their own investment values so that year-on-year progress can be identified. Setting targets through mechanisms such as these facilitates a way in which funds can actualise their own vision for their RI performance, even if the composition of these targets shifts and changes as the fund grows in experience.
Redefining success for a maturing RI market
It is clear that different fund types prefer different RI approaches and strategies. Increasingly, the fund type – corporate, private, non-regulated or industry – dictates the kinds of RI strategies that are likely to be popular with their membership-base or market offering. As this trend continues to materialise, researchers need to consider whether the RI assessment framework needs to be varied across fund type. Is there a different best practice model of RI for a corporate fund, as opposed to a public-sector fund? What value versus values decisions occur in this? As an industry, does superannuation believe that there are clear hurdle strategies for all funds undertaking best practice RI investment? If so, what are these strategies?
Another clear theme that arose from the research was the increasing reliance of funds on the RI expertise of investment managers and asset consultants. In their comments funds acknowledged that they were often solely dependent on investment managers and asset consultants to provide RI information for investment decision-making. Some funds had measures in place to ensure these parties could verify their knowledge, but for others the relationship had seemingly grown organically on a case-by-case basis. Where this trend continues, it will be important to consider how investment managers and asset consultants are held to account for RI rigor. We also need to consider how RI research houses – another party identified – can demonstrate best practice in their field.
Building upon the foundation of ESG integration
Integration of ESG and associated active ownershipcontinue to be the starlet of superfund RI practices. As the strategy with the greatest longevity in the Australian market, it is important to query what has been learned from applying this RI tool over time and also how these findings can be applied to other asset classes or conversely, for what asset classes this strategy is not effective.
While some investment philosophies identify ESG integration as the primary form of RI commitment for a fund, it is important not to become complacent and consider that the ‘job is done’ with ESG integration. Rather, funds need to ask themselves if their ESG integration strategies are actualising RI-based market signals (or simply maintaining the status quo) and if their RI approach is holistic across asset classes and investment products. If integration is the key strategy, they need to ask themselves:
- How can the approach be consistently applied to alternative asset classes?
- What challenges does this raise?
- Can integrity be ensured when making this extension?
- If not, what other avenues are available?
Philosophy versus transparency
Measurement and transparency continue to be a challenge for funds. If we truly want a maturing RI market, and want to call ourselves experienced RI investors, this is a nut we must crack. Active owners’ responsibility for transparency is as great as their responsibility for confidentiality. Negotiating the relationship between these two is an important place to start thinking about reporting.
Measurement and disclosure is vital to a fund’s ability to reflect upon and review the effectiveness of its RI strategy. Moreover, transparency on RI activities is critical to providing external assurance that a fund is acting on its stated commitments.
For example, many funds noted that engagement activities were not reported publicly in any form. This raises the question: what are forms of reporting and public disclosure that can maintain a fund’s relationship with its investee companies, whilst still providing concrete accountability as to the methods, content and progress of engagement relationships? Some funds provided statistics on engagements, others provided lists of issues on which engagement occurred, suggesting that there are ways and means to measure and report while protecting a fund’s relationships and reputation. Special interest groups and stakeholders are increasingly active in holding investors accountable for RI practices. In such an environment, fund disclosure on engagements needs to demonstrate the substance and integrity of their stated commitments.
Where to from here?
As is suggested by the last two RIAA Superfund Benchmark reports, the only way is up. While progress across the Australia market has somewhat been a numbers game involving encouraging more funds to recognise and commit to RI, the tide seems to be turning towards the quality of ESG integration and the ability of funds to up the ante on their thinking, strategy and implementation across new asset classes. The spectrum of RI approaches being used across Australian super funds suggests that there is a level of sophistication that is being gained in fund expertise, as well as increasing demands on investment managers, asset consultants and research providers. This positive momentum is hopefully able to grow and expand as funds rise to the critical challenges of climate change risk and an increasingly unstable economic environment.
Interested in discussing this issue further? Feel free to get in touch.