Super funds turn up the temperature on road to net-zero emissions

The nation’s $3.3 trillion superannuation sector will play a key role in engaging with business in the shift to net zero emissions.

Superannuation funds are engaging more with business on hitting net-zero carbon targets.

The powerful superannuation fund industry has flagged it will take a greater focus on the risks of climate change and the impact it is expected to have on the performance of the funds that control $3.3 trillion in savings.

Peak body the Association of Superannuation Funds of Australia has released a discussion paper that calls out the importance of greater of greater engagement with business on climate issues in coming years.

“In the absence of a commitment to net-zero greenhouse emissions by 2050, the superannuation industry stands to lose billions of dollars in investment returns on behalf of their members, which ultimately translates to less retirement savings,” ASFA chief executive Dr Martin Fahy said.

The paper dives into the reasons that superannuation funds should consider climate change risk when making decisions and the importance of using mitigation strategies to reduce the risks.

Many funds have already committed to reach net zero greenhouse gas emissions in their portfolios by 2050 and to engage with businesses on climate change risk to support them as they also work to cut climate change risk.

ASFA is seeking views on key issues relating to climate change risk that have an impact on the entire superannuation system and argues that climate change risk is a necessary consideration for funds.

Suggested mitigation strategies that funds can use include committing to reach net zero greenhouse gas emissions in their investments by 2050 and engaging with funds managers they award mandates to abide by climate principles.

Major regulators have already recognised the significance of climate change risk to Australian organisations including superannuation funds. The Australian Prudential Regulation Authority recently released draft guidance on managing the financial risks of climate change.

APRA’s draft guidance said the risks of a changing climate extended to all sectors and argued the financial sector should consider both opportunities and financial risks of climate change.

The paper said that the diversity of assets held by superannuation funds — ranging from shares, debt and real assets — meant the overall exposure to climate change risk was significant.

Ratings agency S&P Global estimates that 66 per cent of major global companies have at least one asset that has physical climate change risk and up to 13 per cent earnings at risk, by 2025, under a high carbon price scenario.

Superannuation funds that have adopted a commitment to reach net zero greenhouse gas emissions in their investment portfolio by 2050 will effectively decarbonise and transition to investments in low-carbon models.

The paper argues that switching to a low carbon investment portfolio over decades helps prevent the creation of financial stability risks.

The superannuation industry’s substantial size has the potential to have a systemic impact on the Australian economy with the Reserve Bank noting that if superannuation funds had to sell assets on a large scale, “it could amplify asset price declines during periods of stress”.

ASFA said an orderly transition would help ensure market impacts are not as volatile and insisted that a net-zero emission commitment does not, necessarily, require the divestment of assets.

“The divestment of asset holdings in a particular sector or industry can unnecessarily place limitations on potential investments that can be considered by a superannuation fund, though it is usually used when a business is not open to engagement,” the paper said.

ASFA, however, said that generally, an engagement approach is preferred when decarbonising an investment portfolio.

“Engagement through discussion and consultation provides investors with opportunities to make their views and concerns known about the actions or direction of the business they are invested in. It is also the preferred approach by UN’s Net-Zero Asset Owner Alliance,” ASFA said.

Originally published as Super funds turn up the temperature on road to net-zero emissions