Walk the line—a good trustee can be a good corporate citizen

15 Mar 2016

Like many other financial institutions, UniSuper often gets called upon to ‘divest’ from certain companies or sectors for a number of reasons. We spoke with our Head of Risk and Legal Services: Investments, Luke Barrett, about investing, divesting and how funds like UniSuper draw the line.

What’s UniSuper’s main duty and line of thinking when it comes to managing members’ retirement savings?

We always aim to provide our members with greater retirement outcomes—in fact, that’s the central pillar of our company strategy. That philosophy is very much part of our culture and comes through in everything we do. Whether we’re helping members who come in to see us, developing new product ideas or negotiating investment deals and selecting the investments we wish to make, it’s always about providing members with greater retirement outcomes.

From a legal point of view, the law requires us to take a similar approach. Every super fund in Australia owes a ‘fiduciary duty’ to its members. There are entire text books on what this entails and it can get quite complicated. In simple terms, there’s a legal obligation to act in the best interests of members.

This doesn’t mean super funds have to guarantee the best possible outcome for every individual member. And it doesn’t mean we have to do things that benefit members outside of their super entitlements. In fact, the law prohibits us from doing so.

What does ‘fiduciary duty’ mean then?

It means super funds have to make their decisions in a way which is likely to achieve the best financial outcome for members as a whole. The law is clear that we have to focus on financial outcomes at all times, and this is a principle that generally applies to every super fund. We can’t do things we know will jeopardise members’ retirement savings and which will result in them sacrificing some of their retirement benefits. And we wouldn’t do that anyway, because it goes against our philosophy of providing greater retirement outcomes.

Does the superannuation industry think about climate change in an investment context?

Climate change gives rise to an enormous amount of discussion and debate, which is fair enough because it’s an important issue which deserves to be analysed, discussed and debated. When socially responsible investment products were first introduced to the market, some people were worried that funds offering those products might be doing the wrong thing—especially if those investment products ended up earning lower returns. In the end, everybody realised that it was fine to offer these products on a choice basis because members would go into those options knowing what they were buying into. Ironically, 15 years later, some groups say that funds that don’t rule out particular types of investments—like companies posing a greater risk to the environment—might be doing the wrong thing by failing to rule out those investments. We’re now seeing a more nuanced approach being taken to climate change and other environmental, social and governance (ESG) risks.

Can you explain UniSuper’s approach to climate change?

It’s entirely legitimate for a fund to think about how its investment returns could be impacted if the companies it invests in don’t properly manage climate change and other ESG risks. We do this for all of our investment options and the Defined Benefit Division. Accumulation members can also choose from several investment options that target ESG issues in a direct, specific way. At the end of the day, if the risks are reflected in the share price, a company may still be an attractive investment opportunity. In other cases, the risks may pose too great a threat to the financial returns from investing in the company. This is why we don’t invest in tobacco companies.

Can funds just divest (or sell) their shares in companies causing environmental harm?

There is definitely pressure from some quarters to divest holdings in particular companies perceived as having negative environmental impacts. The law is clear that super funds must have a financial focus when making investment decisions. If a fund allows itself to be swayed by non-financial considerations, or by considerations which go beyond its members’ super entitlements, its governance and decision-making processes could be called into question. At the extreme, a super fund could be called upon to compensate its members for any investment losses resulting from investment decisions which weren’t based on financial grounds. Even if motivated by the best of intentions, the integrity of the superannuation system would start to unravel if funds started turning their backs on members’ financial interests and wilfully breaching their fiduciary duties.

There’s definitely scope for a nuanced and sophisticated analysis of the risks. That may well lead to a fund selling its stake in a particular company—either entirely, or by partially reducing its holding to reduce the financial risk posed by that company. If a divestment decision is made through that kind of process, the super fund is acting in the way that the law requires it to.