Market Forces has released a new legal opinion on the extent to which Australian law requires superannuation trustees to consider climate change risks when managing portfolios on behalf of their members. Commissioned by Market Forces, the memorandum of opinion, Superannuation Trustee Duties and Climate Change Risk, was provided by Noel Hutley SC and James Mack on instruction from Environmental Justice Australia.
The legal opinion demonstrates how the financial risks posed by climate change should be considered by trustees in order to fulfil their legal duties.
“In our opinion, if a trustee director were confronted with a significant investment decision that involved a substantial exposure to climate change risks, it would be prudent to seek out information in relation to the risk and obtain advice on the risk. It would also be prudent, following a consideration of the relevant materials, for a trustee director to have a record of the consideration of the risk.”
In summary, the opinion reached three conclusions:
- Climate change risks can and should be considered by trustee directors to the extent that those risks intersect with the financial interests of a beneficiary of a registrable superannuation entity
- The differing functions of a company and a trust are such that considerations of climate change risk may result in different emphasis and outcomes
- Trustee directors should source, consider and weigh relevant information relating to climate change risk and record their decision making processes, including any considerations of climate change risks.
The opinion recognises that both the transition and financial risks posed by climate change have financial effects, which should be considered by trustees in situations where they may impact the financial interests of their beneficiaries. For example, when a trustee is making an investment decision on an asset that is exposed to climate risk, or when formulating an investment strategy.
This latest opinion adds further weight to the views expressed by APRA board member Geoff Summerhayes, who said earlier in 2017 that “the days of viewing climate change within a purely ethical, environmental or long-term frame have passed”. It also follows an October 2016 opinion from Noel Hutley SC and Sebastian Hartford-Davis, which outlined company directors’ duties to consider climate change risk.
Another significant development in the area has been the release of the recommendations of Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The Task Force “believes climate-related risks are or could be material risks for many organisations” and that asset managers and asset owners, such as super funds, have an important role to play in influencing the companies in which they’re invested. According to the TCFD, this will “improve pricing of climate-related risks, and lead to more informed capital allocation decisions”.
Clearly, the weight of expert opinion indicates that companies and super funds should be taking climate risk seriously, and taking steps to understand and limit that risk.
What does this legal opinion mean for Super funds?
Put simply, super funds can no longer treat climate change as a future problem, or simply an ethical consideration. The legal opinion makes it clear that fund trustees should actively consider how their portfolios are exposed to the physical and transition risks posed by climate change.
These considerations should be taken into account when making investment decisions on behalf of members, and the processes recorded.
Trustee directors who are unable to demonstrate adequate consideration of climate risk are at risk of breaching their duties to members.