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Why divestment should be ‘the last port of call’ for super
While exclusionary strategies seem to be rising in popularity, super funds should think about how to create a “just transition, not just a transition.”
“Divestment should always be the last port of call, not the first port of call,” says Andrew White, director – climate risk, financial services at global consultancy Baringa Partners. “It’s critically important for super funds to have a credible transition plan embedded with their clients or wherever they’re investing, so they can manage the significant amount of market power they have.”
“We need to have a just transition, not just a transition. The consequence of immediate divestment needs to be thought through. The last thing we want is unintended consequences because of – not necessarily reckless – but unconsidered actions taken by super funds around divestment.”
White recently joined Baringa from Suncorp to lead an expansion of its financial services operation in Australia. The consultancy was founded in the UK and has been advising 10 of the 18 banks associated with the Bank of England stress test using a climate model that it developed and which was recently acquired by BlackRock with an eye to integrating it into Aladdin.
Some fund managers have grown sceptical of the orthodoxy around fossil fuel divestment, warning that too rapid a divestment risks a global energy shortfall that will ultimately impact consumers (and performance) to a much greater degree than a more gradual wind-down. There are, of course, going to be assets that will lose value. This shouldn’t be a race to the exit, White says, “but we do need to be mindful that last movers will have increased risk.”
“I think there’s a key point around managing the wind-down of those investments as well as the ramp-up of the associated transmission and renewable pathway so there is stability across the energy system, as well as investment in the newer technologies that will lower the cost of capital and develop economies of scale that will ultimately reduce emissions,” White said.
Engagement can also help super funds overcome the dearth of carbon emissions data , and “taking a consistent and industry approach means less burden on those industries and assets that need to create the data.”
“In terms of developing metrics, you need to have some level of engagement with where you’re investing so you can access the right data – like finance submissions data, which is normally a key one in the case of net-zero. Without having publicly-available information, that requires a level of engagement to ensure that you can access it.”
However, super funds might fall foul of another wicked problem. Recent fund launches suggest that a strong exclusionary approach is what members really want, and it will be hard to justify engagement with pollutive companies and the setting of tolerance levels for a member base increasingly looking to explicitly sustainable or ethical funds like Future Super and Australian Ethical.
“There is always the risk that members have the choice of moving their superannuation, and climate and ESG is always going to be one of those factors – if anything it’s going to be a growing factor,” White said. “And as part of that, disclosure to members is becoming significantly more important to explain what funds are actually doing to engage with their investments, and explaining the level of influence they’re trying to exert over those investments.”
“That should be a foundational layer for members – potential members, as well – to weigh up the right fund to invest in. And having that demonstrable action also helps avoid the accusation of greenwashing.”
