The superannuation industry's failure to disclose evidence they have considered climate risk in their investment portfolios has left them vulnerable to legal action according to a financial services activist group.
Analysis provided by Market Forces, an affiliate project of environmental group Friends of the Earth, showed public disclosures of Australia's 100 largest superannuation funds found that 60 funds disclosed no tangible evidence they have considered the impact of climate risk on their investment portfolios, while 20 funds disclosed inadequate evidence they have considered climate risk.
According to former NSW Bar Association president Noel Hutley and barrister James Mack, this failure puts trustee directors at risk of breaching their duty to members and as such, vulnerable to legal action.
"In our opinion, there is an inherent harmony between the financial effect associated with climate change risks and the cardinal requirement of a trustee to act in the best financial interests of beneficiary," the barristers said.
"It follows that climate change risks can and should be considered by trustee directors to the extent that those risks may intersect with the financial interests of a beneficiary of a superannuation fund."
Making reference to the provisions of the Superannuation Industry (Supervision) Act, they continued: "it is incumbent upon a trustee director, in an appropriate case, to consider the climate change risk in order to satisfy the requirements at s 52A(2)(b) in relation to due care, skill and diligence, s 52A(2)(c) in relation to the best interests of beneficiaries and at s 52A(2)(f) in relation to ensuring a corporate trustee carries out the s 52 covenants."
Of the funds surveyed, 18 were found to have disclosed adequate evidence that they have considered climate risk. These included large retail funds AMP and BTFG and industry funds AustralianSuper, Cbus, VicSuper, UniSuper, Sunsuper and HESTA.
Overall, retail funds represent the largest proportion of assets under management of the group of funds that disclose no consideration of climate risk (52%) despite retail funds accounting for just 31% of the assets under management in the 100 largest superannuation funds.
The legal opinion follows a speech to the Insurance Council of Australia in February 2017 by Australian Prudential Regulation Authority (APRA) executive board member Geoff Summerhayes, in which he noted that climate risks "have often been seen as future or [a] non-financial problems", but made it clear "that this is no longer the case". Accelerated developments in technology have huge implications for the Energy and Utilities sectors, with the potential to reduce coal, oil and gas demand in the short-term.
This is particularly relevant for Australia, "given the size of [its] superannuation sector and its heavy weighting towards carbon-intensive equities", with vulnerable sectors accounting for over a quarter of the S&P ASX300 index.
"Australian regulators have made it clear that super funds need to assess climate risk," Market Forces analyst Daniel Gocher added.
"Since this has largely fallen on deaf ears, it's no surprise that trustees now find themselves open to legal action for a dereliction of basic fiduciary duty."
"The funds that are considering climate risk would be doing right by their members to disclose it. As for the funds that are ignoring climate risk - if the warning signs from regulators haven't jolted trustees into action, perhaps the realisation of legal liability will."