Super funds can wield their financial muscle responsibly

More fuel is being added to the financial services fire this week with the Productivity Commission report highlighting the challenges in making our superannuation system efficient, competitive and focused on delivering the best outcomes for Australians.

What's clear is that as one of the world's largest, and fastest growing, pools of capital of the world, Australia's superannuation industry is carrying a new weight of responsibility not seen before in Australian financial markets.

This extraordinary pool of capital is playing a significant role in fuelling the domestic and global economy, through investments in real estate, infrastructure, agriculture, renewable energy, health care, and much more — with many of our super funds sitting as significant shareholders of these companies.

But as the Productivity Commission report highlights, super funds are facing ever more questions to answer on their delivery of outcomes for members — approximately 15 million Australians.

A focus on fees and the performance of funds is spot on, but there is another outcome that increasing numbers of Australians are also concerned about — that is whether their super is delivering the type of Australia they want to live in and leave behind.

Funds are switching focus away from short-term financial gain

This convergence of super fund growth, alongside the increasing demand for consumers to see their money managed responsibly and ethically, is starting to redefine the way business is done in this country.

A report released this week by the Responsible Investment Association Australasia provides an additional view on how Australian super funds are delivering outcomes for Australians, with many of our largest super funds working to improve the behaviour of corporate Australia, and offering important lessons for business and the wider investment community.

RIAA's research reveals that for Australia's 50 largest super funds, 80 per cent have in place firm public commitments to manage their funds as responsible investors.

This means that most superannuation funds are no longer solely focusing on a narrow set of short-term financial returns. Rather, they have acknowledged that to act in the best interest of members and maximise financial returns in the long term, they must consider the impact of their investments on wider society and the environment.

We can see how these commitments translate in the real world with a number of Australia's largest super funds beginning to flex their ownership muscle.

Over the past six months, there have been an unprecedented number of shareholder resolutions to improve company behaviour, with many super funds taking strong voting positions against board directors (AMP), on remuneration reports (QBE), on climate change risk disclosures (Santos and QBE), on industry body memberships (Rio Tinto and BHP) and on human rights issues (Woolworths).

Funds are engaging with companies to influence outcomes

But these voting outcomes are just the tip of iceberg. In the lead-up to these AGMs, a number of super funds engaged directly with these companies to influence outcomes.

Pleasingly this engagement — combined with the vote, and the pressure put to bear by NGOs — had results.

QBE committed to enhance disclosures on climate change, BHP dumped its membership of the World Coal Association and put the Minerals Council of Australia on notice, Santos delivered climate change scenario analysis, and Woolworths is working to identify and address human rights abuses in its supply chain.

Super funds are also showing a willingness to dump stocks when engagement is proving ineffective.

Over recent years, the wave of tobacco divestment has resulted in $3 billion moving out of these pariah stocks.

But beyond tobacco, there are examples of super funds divesting of weapons companies, tech stocks, banks, coalmines and companies violating human rights.

A number of super funds are seeking out investment opportunities far beyond the ASX200 into assets such as hospitals, renewable energy, agriculture, affordable housing, aged care and social services, as well as showing a growing interest in venture capital to support "for purpose" business.

This is all far from ad hoc activity and correlates to our research and broader global analysis, confirming that responsible investment funds largely outperform their average mainstream counterparts year on year.

Photo There are examples of super funds divesting of weapons companies.

Scud, other missiles at S Korea war memorial Reuters: Lee Jae-Won
Funds are facing calls for transparency and accountability

However, there's still a way to go for many super funds to realise the opportunities of more responsible investment and to maximise the positive impact they have on society and the planet.

Our research found that nearly a third of Australian super fund boards are yet to consider climate risk and only a handful of funds have converted their concern for climate change into quantifiable targets.

In terms of transparency, very few super funds report on the outcomes of company engagements and only a tiny number provide full disclosure of their portfolio holdings.

The requirement and expectation of transparency and accountability — long familiar to corporate Australia — is now also the new reality for superannuation funds.

So too is the need for the superannuation industry to firmly put its members and clients first, recognising that to deliver good financial services is to help clients achieve their financial goals in a manner consistent with their personal values and ethics.

For those super funds that deepen responsible investment across their organisation and investment portfolio — and tell their story well — consumers promise to respond.

Research conducted by RIAA last year shows that four in five Australians would consider moving their super or other investments to another provider if their current fund engaged in activities inconsistent with their values.

This is the wake-up call many of Australia's super funds are heeding, seeing the opportunity responsible investment offers to both drive superior investment outcomes as well as deepen member engagement in an otherwise homogenous marketplace.

With public scrutiny of Australia's financial services industry at an all-time high and trust in business at an all-time low, our superannuation funds hold a key to wealth creation in all forms, supporting our economy, society and environment for the long haul.

It's a big responsibility — and we all should help ensure that they succeed.

Simon O'Connor is CEO of the Responsible Investment Association Australasia.

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