Australian Supers Should be Bolder on Climate – IGCC
New report finds Australia’s powerful asset owners are reluctant to take public stands against companies that are failing to reduce greenhouse gas emissions.
Australia’s US$2.45 trillion pension system should take a more public role in pressuring companies to improve their climate strategies – including by declaring voting intentions ahead of annual general meetings.
That’s the view of the Investor Group on Climate Change (IGCC), an investor-led body focused on helping Australia and New Zealand’s asset owners and fund managers navigate climate risk.
In its latest ‘The State of Net Zero Investment 2024’ report, the IGCC said Australian institutional investors had continued to increase their climate activities despite global headwinds from the ESG backlash in the US and increasing scrutiny on greenwashing within Australia.
But when it came to putting real pressure on companies to improve climate policies, funds were too reliant on behind-the-scenes discussions, it found.
Nearly 60% of the 63 groups surveyed in the report said they had engaged companies directly. But only 26% had set formal engagement targets, and just 14% had predeclared voting intentions for shareholder resolutions and board re-elections.
The IGCC urged investors to consider taking more public stands, saying they had a fiduciary duty to “actively [engage] with portfolio companies on sustainability issues to protect and maintain long-term shareholder value in alignment with beneficiaries’ interests”.
“Investors have significant opportunities to enhance corporate engagement and stewardship practices by establishing clear engagement targets and leveraging a broader range of engagement and escalation activities when targets are not met,” according to the report.
These activities could include “voting or pre-declaring voting intentions on climate transition plans or director re-elections, and writing public/private letters to the board”, an IGCC spokesperson told ESG Investor in response to questions.
Gentle giants
Australia punches well above its weight globally in pension assets. Its economy is number 12 in the world, but its collective pot of pension, or superannuation, money is the fifth largest at A$3.7 trillion (US$2.45 trillion). Only the US, Japan, the UK and Canada have larger pools of retirement savings.
Australia’s vast pension wealth is a result of a 32-year-old law that requires employers to make workplace pension contributions on behalf of their employees.
As a result, funds like AustralianSuper, Aware Super and Australian Retirement Trust have become powerful players on the global investment stage, while super fund-linked fund managers like IFM Investors and Queensland Investment Corporation are top investors in global infrastructure.
These funds are often the biggest shareholders in Australian-listed companies and major shareholders in other markets. If they take a public stand, companies usually listen.
Pre-declaring voting intentions is a key tool for investors wanting to put public pressure on companies to change their behaviour. Often filing shareholder resolutions with a number of key institutional backers can be enough to affect change in the company without going ahead with the vote.
But pre-declaring voting intentions is “relatively rare” among Australian investors, “compared to other markets”, an IGCC spokesperson told ESG Investor, though they added it does happen. Aware Super, for example, publicly announced it would vote against oil and gas giant Woodside Energy’s director at the group’s annual general meeting in April.
Brynn O’Brien, executive director of the Australasian Centre for Corporate Responsibility – a non-profit that has led a number of high-profile climate-related shareholder resolutions across Europe, Australia and Japan – said Australian funds were less bold than British and European counterparts.
“We certainly see UK and European investors being much more comfortable having an outcomes-focused engagements – setting objectives and using tools, or threatening to use them,” she said. Simply relying on private meetings was not an effective strategy, she added.
“Is it possible to get outcomes through private engagement? Yes, it is. But I don’t see a lot of evidence of results without the credible threat of escalation,” O’Brien said. “Just showing up and having a nice conversation and seeing what happens – I don’t see any evidence to suggest that leads to results.”
O’Brien said an earlier focus on climate disclosure was a “useful phase of investor activity”, but investors needed to move beyond that and demand action to reduce emissions.
Political pressure
One reason for funds’ cautiousness may be the politicisation of both climate change and superannuation in Australia.
The country is a major exporter of coal and liquefied natural gas, and policies designed to curb fossil fuels often face powerful opposition from the sector itself, the conservative Liberal and National parties, and the right-wing media.
Many superannuation funds, meanwhile, are affiliated to trade unions and close to the left-of-centre Labor Party, which is currently in government. Conservative forces in the country are sensitive to any activity by super funds that they interpret as politically or ideologically motivated.
In addition, the Australian Securities and Investments Commission, the financial watchdog, has started to crack down on greenwashing. As a result, funds that previously trumpeted supposedly green credentials are now avoiding saying anything about them, in what has been dubbed ‘greenhushing’. O’Brien said this could also be used as an excuse for inaction.
Meanwhile, in the US, where many Australian funds have large investments, institutional investors face a powerful backlash against ESG investing from the Republican Party. O’Brien said the headwinds in the US in particular were “very difficult”.
“It’s a challenging time to do this work, but it still has enormous potential impact. We need to move beyond this talk phase and into an action phase – we’re running out of time,” she said.
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