Super funds can be part of the climate change solution

As custodians of the long-term economic future of millions of Australians, our superannuation funds can and should do more. The government has a social licence to make the change.

The government has a social licence to do this for many reasons, not least of which is the estimated tax expenditures of $49 billion on super in this financial year alone.

This column is published in The Green List: Top100 Green Energy Players, out Friday.

At the risk of stating the obvious, the Australian superannuation system depends on economic growth to function. The bad news is that, so far, this growth has almost always involved the release of greenhouse gases.

We have all but consumed the planet’s emissions budget and have fewer choices and less time but need to take disruptive and expensive remedial action. This is especially so for a country such as Australia, the world’s second largest exporter of coal and liquefied fossil gas. That’s not to mention other exports such as iron ore that involve significant CO2 emissions in the processing of them into finished products. We all live on the same planet and are all affected by those emissions.

Super has been the beneficiary of 30 years of growth, during which time man-made greenhouse gas emissions grew in unprecedented volumes. About half of the 1.5 trillion tonnes of CO2 emitted globally since the Industrial Revolution occurred post-1990. Where does this leave super? It has to be a bigger part of the solution.

Treasury is consulting on new climate-related financial disclosure standards expected of large corporates. This is to bring Australia into line with new international corporate sustainability disclosure standards released in June. Disclosure is a necessary but insufficient condition. We also need legislated emissions-reduction targets for all big super funds. Disclosure of progress against those targets is what will help meet them.

There are currently no legislated emissions-reduction targets for superannuation fund investment portfolios, even though the government has set “ambitious, but achievable” targets for the nation to reach by both 2030 and 2050. With no clear carrots or sticks for super funds, the approach they are taking is a bit of a mixed bag, to put it mildly. This was highlighted by consulting firm Aurecon in a June 2023 report on super fund climate-related disclosures.

Aurecon examined disclosures by Australia’s top 10 super funds ranked by total assets against a subset of the new global standards. The 66-page report was unflattering. The key criticism was that information was “generally not accessible to key decision-makers to consider the impact of climate-related risks on the value of their investments”.

Very few super funds have 2030 emissions-reduction targets for their investment portfolios, as opposed to their own operations. The end result is a lack of uniform commitment across the system. This, combined with the poor disclosure, makes it near to impossible for members (or even experts) to compare fund performance on emissions reduction. This won’t be good enough. Even having a “net-zero by 2050 portfolio” target, without being much clearer about progress along the pathway, is insufficient. It’s a bit like saying that the next generation of management will have to deal with decarbonisation.

The science is clear that a massive near-term effort will pay the most dividends because it reduces the cumulative effect of increasing emissions. With carbon emissions making up more than 420 parts per million (ppm) of the Earth’s atmosphere today, we are already so close to the dangerous level of 450 ppm that we have no time to waste.

What could government do to get more support from superannuation in achieving national emissions-reduction targets, while maintaining the integrity of the system?

It could make its first move outside the super system by directing the Future Fund to reduce the carbon intensity of its portfolios through a revamped investment mandate or a statement of expectations. The fund could also be required to have a separate climate advisory board (as per the $2.2 trillion Norwegian oil fund). Enlisting the Future Fund in this fight would also send a signal of expectation to the wider super industry. Carbon advisory boards might quickly become the norm. The fund is ideally placed to set the standard here.

The government could go further to proscribe the fund from investing in, say, fossil fuels, beyond the existing prohibitions on investing in arms and tobacco. This issue was raised in a Future Fund senate estimates hearing in November 2022. One minister suggested that the government was already considering a better alignment of the fund’s investment mandate with its own commitment to net-zero emissions by 2050. In October the government released proposed rules that will require the Future Fund to disclose its investment holdings on a six-monthly basis, much like the disclosures required of super funds under the so-called “portfolio holdings disclosure” (or PHD) regulations introduced in 2021. PHD regulations were resisted by big super in various exposure drafts of legislation released by successive governments since first recommended in 2010. Big super complained vociferously that earlier proposed versions of PHD went too far. The final legislated version seems to have reached an acceptable compromise between “over disclosure” and useful and informative transparency. Adoption of a similar regulation for the Future Fund seems a sensible step forward, but it won’t move the dial on carbon emissions. If the government really is minded to seek better alignment of the Future Fund’s investment mandate with its own 2050 net-zero target, now might be a good time to move on climate targets for the fund to coincide with the imminent changes at its top table.

Next, the government could impose the equivalent of a Safeguard Mechanism, currently in use for industry, on big super. Under this scenario, super funds would have to reduce the CO2e budget for their portfolios each year by a certain percentage. Funds with a net-zero by 2050 target will have to do this anyway, for targets to be genuine. This step would make that reality universal, clear, and measurable across the industry.

The government has a social licence to do this for many reasons, not least of which is the estimated tax expenditures of $49 billion on super in this financial year alone. (This represents the concessional tax treatment of contributions and earnings on a revenue forgone basis.)

Some might say these ideas are too heavy handed and the big super funds should be allowed to choose how quickly they reduce the emissions intensity of their portfolios. The government has both the need to do this (harnessing the power of hundreds of billions of dollars of patient capital in the fight against climate chaos more urgently) and the social licence.

The Green Economy: Out Friday

Further support for enlisting super in the carbon-reduction challenge comes from an OECD report released in October. It urged that Australia’s carbon emissions needed “to decline on a much steeper trajectory” if its existing 2030 and 2050 targets are to be met. It called on the government to broaden the existing safeguard mechanism on big polluters so that it applied to a “broader set of economic sectors”. Super fits in neatly with this recommendation as it is not difficult to conceive it as an “economic sector” in its own right. Expanding the safeguard mechanism to a wider group of carbon emitters was also urged by the Productivity Commission in March. Interestingly, the OECD suggested that such measures “will not necessarily imply choking economic growth”. This is OECD code for the view that such measures actually create economic opportunities for a nation such as Australia.

The attraction of these ideas is that they target large and sophisticated institutions, rather than individual households. The suggested measures would result in the largest capital allocators in the country sending a strong signal to corporates to undertake carbon-reduction activities more rapidly and effectively than they otherwise might. We have seen from the recent watering down of climate commitments by the UK government just how politically difficult it can be to implement climate-related policy changes that affect individual preferences at the household level. These ideas aim to avoid those difficulties while leveraging the vast amounts of capital involved. They don’t seek to pick winners. Whether or not to allocate capital to specific renewable energy projects, for example, would remain a matter entirely for the super funds themselves. There would be other details to resolve; for example, whether the benchmark performance tests would need to be amended and so on. The real question is, why wouldn’t we do this?

Jeremy Cooper is a former ASIC deputy chair, former chairman of retirement income at Challenger, and chaired the 2009-10 Cooper Review into superannuation.