Super funds need to balance returns and ESG

Achieving positive returns for retirees while acting ethically for younger members is a need superannuation funds are having to balance, according to a panel.

At the CFA Societies Australian Investment Conference, panellists were given a case study on whether a hypothetical super fund should abandon or retain its ex-fossil fuel stance in the face of underperformance and failing the Your Future, Your Super performance test.

They were then asked to debate whether they would maintain it and accept the underperformance, make selective reinvestments back into fossil fuels or abandon it in favour of financial returns.

Debating the first answer, Cassandra Crowe, vice president at T. Rowe Price, said some super funds would consider it their fiduciary duty to maintain a fossil fuel-free stance but that it meant the super fund would lose the ability to engage with the companies who may be taking positive actions on renewables.

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Clare Sa’adeh, director of relationship management and sales at MFS Investment Management, debated the second answer and said she believed that option would run the risk of a super fund selecting the wrong companies to reinvest into.

“I think [this option] allows trustees to maintain some sort of commitment to sustainability by selecting best-in-class companies and being discerning about that,” she said.

“And then they have the opportunity to engage with the companies, hold them to account and ensure they met their climate change plans.

“But if they choose the wrong companies or those companies don’t execute well then that could slow down the energy transition.”

Nidal Danoun, executive director at Prosperity Financial Services, selected to debate the final option which he described as “at odds with public sentiment”.

However, given retirees were focused on wealth, this would be a good option for them in the short term. Focusing on investing the funds’ assets for the purpose of retirement would also help the trustees to meet the sole purpose test and would reduce the likelihood of redemptions which would protect all members.

The option would likely to “alienate” young members though, he added.

“They are invested in the future and the future of the environment. Although retirees have a significant chunk of the fund’s assets, the balances of younger members are naturally increasing so we need to be careful and find a balance for them.”