The superannuation industry has a critical role to play in driving the low-carbon transition across the global economy. With the $3.3 trillion under management1, and as an influential stakeholder group, Superfunds are uniquely positioned to engage with investees, companies, and other asset owners to drive climate transformation at scale and to deliver long-term investment outcomes. Failure to support the transition to a low-carbon economy could cost Australians billions in retirement savings, as financial risks from climate change increase2. The Association of Superannuation Funds (ASFA) estimates that close to 10 percent of the total economic value could be lost by 2050 if climate change continues its current trajectory3.
Superfunds have a responsibility to act in the best financial interest of their members. Given the long-term horizons of super investments, integrating Environmental, Social and Governance (ESG) considerations into investment decision-making may assist in future-proofing and protecting Australians’ investments. This is partially due to ESG risks being long-term and often multi-generational. The Responsible Investment Association Australasia (RIAA) 2020 Benchmark Report revealed that Australian and multi-sector responsible investment funds outperformed mainstream funds over one, three, five and ten-year time horizons4.
This shift to sustainability-focused investments has largely been driven by the private sector and individuals. Deloitte's recent global survey5 revealed strong public support for bold climate action, across geographies, age groups, and income levels. Two-thirds of those surveyed (67 percent) said their government should do more to fight climate change. Globally, 52 percent said they would support new climate regulation, even if it made some goods or services more expensive or unavailable. Deloitte’s Millennial and Gen Z survey6 reported that over 50% of people were optimistic that people’s commitment to take personal action to address environmental and climate issues would be greater post-pandemic. Despite job security, health concerns and the global economic crisis of COVID-19, climate-change remained the greatest concern amongst those surveyed.
The consideration of these ESG factors in investment decision-making requires a clear path to achieve goals and targets and navigate the transition while protecting returns.
The Australian Government’s recent commitment to net zero has increased pressure on the financial sector to set net zero targets and disclose detailed decarbonisation plans. Global voluntary disclosure of climate-related financial information in alignment with the recommendations from Taskforce on Climate-Related Financial Disclosures (TCFD) is increasing in importance in Australia, and the United Kingdom announcing new reporting regulations in the lead up to COP 26.
The Australian Prudential Regulation Authority (APRA) has released guidance on climate risk and opportunities7 and the Australian Securities and Investment Commission (ASIC) is increasing focus on monitoring organisations’ disclosures. The IFRS Foundation has announced the formation of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of ESG and climate data for the global financial markets, to facilitate consistent and comparable reporting across jurisdictions and to direct capital to long-term resilient businesses. In addition, membership bodies such as the United Nations’ Principles for Responsible Investment (PRI) are increasing expectations on signatories to enhance their responses to material ESG issues, particularly climate change, including quantifying outcomes. Emerging regulations are also focusing on the social pillar. The Modern Slavery Act 2018 was recently enacted to encourage regulatory disclosure surrounding modern slavery risks.
Superfunds must understand and prepare for how they are going to integrate ESG into their business strategies and investment decision-making, while meeting stakeholder expectations and regulatory compliance.
We believe a key first step for organisations is to determine their strategic ESG positioning. Where a fund aspires to reach on the ESG maturity curve (Figure 1), must link to the fund’s broader corporate strategy as well as meet their stakeholder expectations.
Figure 1: Deloitte ESG integration maturity curve
Once a fund has determined their ESG positioning, it must develop and commit to an ESG aspiration. These long-term goals will inform the development of their ESG strategy which must be ingrained into existing business practices. We believe organisations should determine what risks and opportunities are having the largest impact on their business operations and financial performance, and what factors8 are driving them. Deloitte’s five step ESG transformation process (figure 2) outlines how superfunds can drive the transition to a low carbon economy.
Figure 2: Five-step ESG transformation process
Superfunds and the wider financial sector have a critical role to play in driving action throughout the economy. They are uniquely positioned to influence their stakeholders to drive their low-carbon transitions and to deliver long-term investment outcomes. Superfunds must identify and manage their risks and opportunities and develop clear, forward-looking strategies to achieve their objectives in line with the Paris Agreement, as well as to meet consumer, member, regulatory and investor expectations alike. The time to act is now!