Super fund trustees must consider climate, warn Aussie legal experts, as APRA issues guidance

Updated legal opinion says trustees should not ‘unquestionably’ rely on asset managers to handle climate risk

Two Australian barristers have warned superannuation fund trustees that they are “obliged” to understand and manage the “risk posed by climate change to investments” in a new legal opinion on their duties, published today.

In an update to their 2017 opinion, Senior Counsel, Noel Hutley, and commercial barrister, James Mack, argue that: “It is clear that in order to comply with obligations under the superannuation law, a superannuation trustee needs to ensure its processes, structures and expertise are responsive to the financial risk posed by climate change”. 

They describe the nature of the financial risk posed by climate change to funds as “ascertainable and also likely to be material”. 

‘It is not enough for superannuation trustees to unquestionably rely on investment managers to manage any financial risk posed by climate change’ – Legal opinion on trustee duties

The Memorandum of Opinion: Superannuation Trustee Duties and Climate Change, which is dated 16 February, was undertaken at the request of NGO Market Forces, in light of the developments that have taken place in Australia since 2017, including statements on climate risks by super funds and the Australian Prudential Regulation Authority (APRA) – which has, today, also put out new draft guidance for superannuation trustees, banks and insurers on managing the financial risks of climate change.

In their legal advice, the barristers also warn trustees that they cannot outsource the oversight of climate risks to their investment managers. 

“In our view, the SIS Act requires superannuation trustees to maintain a constant vigilance over investment managers (whether internal or external)”, the barristers write. “It is not enough for superannuation trustees to unquestionably rely on investment managers to manage any financial risk posed by climate change. Rather, superannuation trustees are required to request investment managers to provide information as to the exposure of investments to the financial risk posed by climate change.” 

The duo also advise trustees to consider divesting from assets with a high degree of climate risk, if it threatens their investment objectives: “If a risk is too great for a particular investment objective, a superannuation trustee will need to consider divestment or a reallocation of funds to less risky investment options/asset classes”.

The legal opinion concludes with a warning to trustees that they “should expect that regulators will exercise their enforcement powers consistently with their statements on climate change risk”.

APRA’s new guidance, which is based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, is out for consultation until the end of July. 

It focuses on governance, risk management, scenario analysis and disclosure and, interestingly, also touches upon divestment. In the document, the prudential regulator suggests that in cases where such engagement by financial institutions “will not result in the climate risks being adequately addressed”, other options may need to be considered, including limiting “exposure to such an entity or sector” or in extreme cases, “considering the institution’s ability to continue the relationship.”