APRA super rules ‘deter ethical investments’, says Mirova boss Jens Peers

This ESG fund expert warns that onerous regulation may put off super funds from investing sustainably.

Mirova US chief executive Jens Peers: ‘Some people care how their money is invested.’ Picture: David Geraghty

The Australian Prudential Regulation Authority’s Your Future, Your Super performance benchmarking risks deterring Australian super funds from ethical and environmental investing, one of the world’s top responsible investment specialists has warned.

In an interview with The Australian, Jens Peers, the Boston-based chief executive of ethical investment fund manager Mirova US, said APRA’s strict rules around benchmarking super funds could see them penalised if they made investments in areas like renewable energy, which could take a longer time to become financially viable.

He said the performance benchmarking system, which came into effect from July 1 last year covering 80 MySuper products, could also favour those funds that had invested in coal companies at the moment, as their shares have gone up because of Russia’s invasion of Ukraine.

APRA rates MySuper products over a five-year period against benchmarks.

Last August it named 13 funds that it said had underperformed the benchmarks, calling on them to improve their investment performance and encouraging them to merge with larger funds.

“The Your Future, Your Super regulation has a short-term focus on single risk management (investment risks),” said Mr Peers, who manages some $US10bn in funds, mainly in global sustainable equities.

He said the benchmarking system, which can see super funds banned from being able to accept new funds if they fall below performance benchmarks for two years in a row, encouraged funds to take a low-risk approach to investing for fear of being “named and shamed” by APRA and potentially being cut off from accepting new money.

“The world is going to a low-carbon economy,” said Mr Peers, who has been in Australia to speak at a conference hosted by the Responsible Investment Association of Australia.

“There is no doubt in my mind that fossil fuels will suffer and find it very difficult to benefit financially.

“Renewables will do a lot better, but there will be times — such as this year — when fossil fuel companies outperform them.

“If you have this short-term focus on investment returns, super fund trustees and the investment personnel at big super funds may not want to make that commitment (to investing in renewable energy).”

 

Mr Peers’ comments reflect a growing concern in the super fund sector that APRA’s Your Future, Your Super benchmarking system, which was designed to weed out underperforming super funds, is having many unintended consequences, including discouraging fund managers from making investments which might be risky in the short term but with prospects of better longer-term performance.

Mr Peers, who has been a regular visitor to Australia over the past few years, meeting with super funds and Australian companies, said there was a danger that the Your Future, Your Super regime would encourage Australian super funds to “all move in the same direction and take no convictions in their portfolios”.

He said this could lead to “passive investing” in companies that are representative of the “old economy but not necessarily in the new economy”.

“Some of these companies may not be sustainable or environmentally friendly,” he said.

Mr Peers is pitching Mirova’s ESG-based investment strategy to Australian super funds and institutional investors.

One of the group’s early Australian clients for its responsible investing strategy, has been health care industry super fund, HESTA.

Mr Peers said he knew he was “opening a Pandora’s box” in publicly raising the issue.

But he said this was also feedback he had got from Australian super fund managers, although some were reluctant to publicly criticise their own regulator.

He said the climate change story was a “long-term investment story” around the world.

He said regulators like APRA were more focused on a short time horizon.

Mr Peers said he did not object to funds being benchmarked but he felt that the current two-year time horizon under the Your Future, Your Super regime was too tight.

He said the system also focused on “past performance” but it was well known in investing that “past performance was not necessarily an indicator of future performance”.

“There is no guarantee that the future will be exactly the same as the past.”

Mr Peers said there were examples in recent history, including the subprime mortgage crisis in the US, where investors made good short-term gains in financial products, only to find they were disastrous in the long term.

He said he supported the idea of super funds having to make more disclosure about their investments, which would allow super fund clients to make their own decisions on what funds to invest in.

While he understood regulators wanting to protect super fund members from poorly performing funds, he said some people might have their own view on how they wanted to have their retirement savings invested.

“Some people really care how their money is invested and they want to see that it is being done in a way which will create an impact.”

Mr Peers said the recent announcement by the US Securities and Exchange Commission (SEC) that it was moving towards mandatory disclosure on carbon emissions and climate change risk for all companies listed in the US, was going to “change the mindset” of companies around the world.

“It’s going to start changing behaviour,” he said. “People will automatically set targets (to reduce their carbon footprint).

“It is going to help the battle against climate change.”

He said it meant that the US was moving closer to the situation in Europe, which now has very high standards of disclosure on climate change related issues for companies.

He said companies that operated on a global basis or had global investors, including those in Australia, would be coming under pressure to follow suit, regardless of what the disclosure rules were in Australia.

He said while there was “greenwashing” around the world, where companies talked about their carbon reduction and environment plans but didn’t actually follow through, he was not worried as there was now a global push to develop reporting standards for companies on ESG issues.

He said companies were not waiting for governments as they pushed ahead with low carbon products such as Elon Musk’s electric car business, Tesla.

“Musk has not waited for regulation to be positive to launch electric cars,” Peers said.

“He has just gone ahead and done it, and he’s going to make a lot of money.”

Mr Peers said global financial markets were now a force pushing for carbon emission reduction and more environmentally friendly investing as well as other social issues such as more gender diversity in companies and ensuring that companies did not exploit cheap labour in their supply chains.

He said he had noticed a change in Australian fund management investing in recent years with many super fund managers now having “sustainability” specialists and teams.