New guidelines for ESG integration at Australian super fund firms

Draft standards from Financial Services Council

Australian default superannuation fund providers will have to implement and disclose environmental, social and governance (ESG) risk management policies under new standards being drawn up by fund industry body the Financial Services Council.

“Poor management of ESG issues can lead to financial risks as well as a decline in the long-term value of investments,” the FSC states. “It follows that an analysis of ESG exposures and risks may offer investors potential long-term performance advantages.” The requirement is limited to employers’ default super funds, the new ‘MySuper’ products.

Environmental issues identified by the FSC include: pollution, biodiversity, climate change, deforestation, energy efficiency and water scarcity.

Among social impacts are diversity, human rights, indigenous rights and labour standards. Governance could include anti-competitive behaviour, audit committee structure, board composition, bribery and corruption and executive remuneration.

The new guidance follows an ESG Reporting Guide for Australian companies published with the Australian Council of Superannuation Investors a year ago.

The FSC has issued new and revised standards on fund governance and proxy voting, under which relevant funds will also have to disclose their proxy voting records.A key change is a move away from aggregated to company level reporting of proxy voting. The revisions will require disclosure on each resolution voted at Australian listed companies. Under the guidance, funds must vote on all resolutions at Australian-listed firms – regardless of perceived ‘materiality’ – unless there is a good reason for abstaining. The guidance is clear: “The taking of a ‘no action’ approach is not permitted under this Standard.”

“Analysis of ESG exposures may offer performance advantages”

Funds will also have to introduce more independent directors and chairs – and “multiple, competing” directorships of funds will be prohibited.

The FSC says: “It is important that this policy delivers a clearer picture for investors of voting policies… given that one of the key objectives is to increase transparency of the investment industry and, in that process, to achieve higher standards of governance.”

The 130-member FSC, whose members have combined assets of more than A$1.8trn (€1.5trn), has launched a two-month consultation on the new standards, which ends on October 22. The final version of the standards will be issued in December and come into force as of July 1 2013, becoming mandatory a year later. Link