The Responsible Investment Association Australasia (RIAA) has called for the definition of ‘sustainable’ in the objective of superannuation to look beyond financial sustainability.
The organisation broadly agreed to the exposure draft legislation released in September, with the proposed objective of superannuation as: “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
In its submission to Treasury, RIAA said it is strongly supportive of the inclusion of the term ‘sustainable’ in this definition.
“However [we] see areas for potential strengthening for a more fulsome definition of this term in a manner that reflects not merely financial sustainability, but equally reflect the consideration of those external sustainability challenges – such as climate change – that risk having outsized impacts on the quality of retirement for Australians,” it said.
“We therefore recommend that the definition of ‘sustainable’ within the legislation and supporting explanatory memorandum is broadened to include the consideration of those external social and environmental sustainability challenges that have the potential to have a great impact on the nature of the retirement of Australians.”
Representing some $46 trillion in assets under management, RIAA said anticipated changes in society, environment, and economy over coming decades are critical considerations in ensuring the superannuation system is sustainable.
“The risks and opportunities of mitigating global warming, and adapting to the impacts of climate change, are systems-wide and global. The direct impacts of climate change, as well as mitigation and adaptation efforts, will increasingly affect investee companies and subsequently the lives of superannuation fund members,” it said.
“Given this, the definition of ‘sustainable’ should be clarified to support responsible investment approaches that focus strongly on the long-term time horizons and consider such externalities.”
Sustainable funds and the performance test
The association also emphasised that, under the proposed objective, it would be important to address any other policy measures that could conflict, such as the current Your Future, Your Super (YFYS) performance test.
RIAA had previously raised concerns in April surrounding responsible, sustainable, and ethical superannuation funds being evaluated under the same performance test as their MySuper peers.
It held concerns that investment approaches like screening and impact investing could result in tracking errors that inadvertently put them on the back foot.
It modelled three responsible investment approaches against the performance test, with the Conexus Institute and FTSE Russell, assuming ‘sustainable’ tracking error of 1 per cent.
The socially responsible growth option applying RIAA’s ‘avoid significant harm’ requirement for certification produced a tracking error of 1.5 per cent, meaning SRI options could result in an unsustainable tracking error risk.
The carbon transition-aligned portfolio with a Paris-aligned benchmark and Australian equities’ low-carbon proxy produced a tracking error of 1.8 per cent, meaning Paris-aligned portfolios could have untenable tracking error risk.
Finally, using the universal ownership of equities plus unlisted ‘green’ assets approach, passive equities, and unlisted assets in sustainability and energy transition, which produced a tracking error of 0.2 per cent, the risks of expanding the test could be significant for some funds.
In its submission, RIAA added: “As per our engagement on that subject, we see that as currently structured, the YFYS performance test provides a disincentive to align super fund portfolios with a net-zero transition, due to the risk of adverse tracking error against current benchmarks.
“Such alignment across policy areas will be essential for this objective of super to be fully implemented.”
Notably, among the 20 non-platform products to fail the YFYS performance test this year were Australian Retirement Trust’s QSuper Socially Responsible option, which will be closed from 1 July 2024, and Cruelty Free Super’s Growth option from Tidswell Master Superannuation Plan.
