Australian superannuation funds are legally required to “understand and manage” the material financial risks of climate change, according to a new legal opinion.
The legal advice, commissioned by Market Forces, was formed by barristers Noel Hutley SC and James Mack.
The advice builds on a previous opinion produced for Market Forces which prompted Rest Super member Mark McVeigh to successfully sue the $55 billion fund over its approach to climate action.
The advice paper states that super funds must take a thorough approach to understanding the financial risks posed by climate change, including obtaining regular expert advice.
“In order to understand the financial risk posed by climate change, in the first step, a superannuation trustee should take a thorough approach. The precise approach will vary depending on the nature of investments,” the advice said.
“If an investment is held directly or is proposed to be held directly there is a need to seek detailed advice in relation to whether the particular investment will be exposed to the financial risks of climate change.”
The purchase of a direct investment gives the investor a controlling interest in the company, or at least enough of an interest to have influence over the course of the company.
The legal advice said where those risks are too great for a particular investment, funds should consider divestment and shifting the funds to less risky investments.
The advice concluded that failing to limit global warming in line with the Paris climate goals would have serious negative consequences across the economy and therefore super fund portfolios.
In line with this, the legal advice said for super funds to be working in the best interest of members, the long term effects of climate change on the economy need to be considered when investing members’ money.
“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,” the paper said.
“This is so because the nature of the financial risk posed by climate change to a superannuation trustee is ascertainable and also likely to be material. “
Market Forces legal analyst Will van de Pol said the opinion makes it clear that super funds have a legal duty to actively understand and manage the material financial risk of climate change.
“This includes considering divestment from high risk companies failing to transition to a decarbonised world,” van de Pol said.
“Both as a result of intensifying physical climate change impacts and the rapid economic transition required to limit warming, high carbon assets like coal, oil and gas projects are already becoming stranded.”
Market Forces research shows that despite the world turning away from high carbon assets, almost every Australian super fund continues to invest in companies which expand the scale of the fossil fuel industry.
“While a number of investors have moved to exclude some coal investments, this is just the tip of the climate risk iceberg,” van de Pol said.
“This opinion reinforces the imperative for funds to independently analyse companies’ climate risk profile and divest from risky enterprises expanding the scale of the coal, oil and gas industries.”