Major Super Fund Rejects Thermal Coal, But Read The Fine Print

On Friday the $28 billion superannuation fund HESTA announced it was restricting its investments in companies involved in thermal coal.

For one of the largest super funds in the country to do this sends a strong message. Super funds have serious clout. With $1.8 trillion, the superannuation system has the money that companies and fund managers want. If the biggest funds start saying they are not interested in fossil fuel investments, businesses and fund managers will have to take notice.

But the fact is, HESTA’s new policy will affect none of its current investments – not a single one – and is therefore little more than a token gesture, and one that illustrates the fact that ‘responsible investment’ is basically window dressing.

 

First, the positives

No other major super fund has a fossil fuel screening policy across all of its investments. Some very small niche funds, such as the $880 million fund Australian Ethical, already have much more comprehensive screening policies on fossil fuel companies, while some big industry funds, such as the $40 billion fund UniSuper, have introduced limited fossil fuel screening in their niche responsible investment options. But none of the big guys have it across the board.

This means that the retirement savings of all of HESTA’s 785,000 members will be contributing marginally less to carbon dioxide levels than those of most other Australians. In the context, then, this is a big step, and HESTA deserves praise for taking it.

 

The negatives

But the difference it makes will be small.

Only new investments will come under the restriction. HESTA said it would “not make new investments in unlisted companies that derive more than 15 per cent of revenue or net asset value from exploration, new or expanded production, or transportation of thermal coal.”

That means it can remain invested in any unlisted companies that otherwise fall into that category. HESTA, like most super funds, only allocates a very small amount of its funds (4 per cent) to unlisted companies.

More importantly, HESTA also said it would not invest in any newly listed company that derives more than 15 per cent of revenue or net asset value from exploration, or new or expanded production, of thermal coal. Any companies already listed on a stock exchange – including all the big mining names – will therefore continue to be fair game.

This restriction is therefore something of a token gesture. Existing listed companies are fine regardless of how much of their revenue comes from thermal coal; unlisted companies in which HESTA is already invested are fine; and companies that derive the majority of their revenue from non-thermal coal and all other fossil fuels are also fine.

HESTA is regarded as one of the pioneers of responsible investment. In the industry fund sector it is outdone only by Local Government Super (who incidentally have been hinting they are going to introduce some sort of fossil fuel screening soon).

Again, in the context HESTA deserves praise; but if that’s the vanguard of responsible investment, then the word ‘responsible’ is being used very loosely.

The reality is ‘responsible investment’ is really a euphemism for, ‘We have a bit of a go at not investing in the really bad stuff.’

 

Ignoring ethics

The vast majority of fund managers who invest money on behalf of super funds explicitly do not take ethical and environmental consideration into account. The blurb in the PDS of BT’s Wholesale Geared Imputation Fund is typical of most funds:

“We do not take labour standards or environmental, social or ethical considerations into account when making investment decisions. However, such issues may affect the financial performance of an investment and any such financial effect would influence our investment decisions.”

Some fund managers say they do take ethical and environmental concerns into account, but only insofar as they might affect investments. BlackRock, which manages more than 11 per cent of HESTA’s total investments, states:

“BlackRock may take labour standards, environmental, social and ethical considerations into account in our investment making process, to the extent such considerations may have a financial effect on investments.”

The clear implication is, if appalling labour standards are good for returns, then the company is eligible for investment.

Barely any funds refrain from investing in certain companies for purely ethical reasons – the very idea is taboo in the investment world on the grounds that it is not the place of fund managers to dictate the social mores of a society.

But when you consider the very dubious labour standards and environmental policies of so many countries (particularly in what the financial world terms ‘emerging markets’), this stance is questionable. As is well known, poor labour standards and environmental degradation can be great for the bottom line, at least in the short-term.

Small but growing interest

Thanks in large part to an interest to responsible investment in the not-for-profit superannuation movement, Australia is a world leader in responsible investment. A number of Australian organisations, such as the Responsible Investment Association Australasia, the Investor Group on Climate Change, the Australian Council of Superannuation Investors, and Regnan, are helping to shape the global debate.

Meanwhile the peak global organisation for responsible investment, the United Nations-backed Principles for Responsible Investment (PRI) is headed by Australian superannuation stalwart Fiona Reynolds (she was formerly chief executive officer of the Australian Institute of Superannuation Trustees, the peak body representing not-for-profit super funds).

More importantly perhaps, a recent survey commissioned by 350.org.au found that the vast majority of Australians would prefer their super fund not to invest in fossil fuels. This suggests there is a latent interest in responsible investment.

But old habits die hard, in fund management as much as anywhere. Unless that latent interest is mobilised, responsible investment will remain little more than window dressing.