Published in ASFA SuperFunds magazine October 2013, http://www.superannuation.asn.au
by Gordon Noble
A growing number of superannuation funds have now divested from tobacco. ASFA recently held a forum with First State Super to provide an opportunity for funds to share their experiences. With Portfolio Holdings Disclosure now legislated with implementation slated for 1 July 2014 it is timely for funds to consider the role that tobacco may, or may not play in their superannuation portfolios.
Dr Bronwny King, an oncologist at Peter Mac, a Melbourne cancer treatment facility, presented arguments at ASFA’s Tobacco and Superannuation Forum on why funds should divest from tobacco. Bronwyn represents what can be described as a new generation of activists. Articulate and intelligent, Bronwyn discovered by accident that she was effectively invested in tobacco when at the end of a meeting on her superannuation with a representative from First State Super the conversation turned to investment choices. Unaware that she could make investment choices the First State Super representative explained that the fund offered sustainability based investment choices that excluded investments in tobacco. Bronwyn’s reaction was a realization that while she had been treating the victims of tobacco she had at the same time been investing in the companies that manufactured and promoted smoking. Rather than just excluding tobacco from her own investments she felt she needed to do something, aware that many health professionals like her did not always pay sufficient attention to the details of their superannuation.
Bronwyn established Tobacco Free Super, and began campaigning for the removal of tobacco from superannuation fund investments. First State Super became the initial focus of the campaign and as a result of front page coverage in daily newspapers began a board discussion to consider whether the fund should divest from tobacco. As First State Super CEO Michael Dwyer admits the issue of tobacco was on the fund’s radar but as the fund was dealing with a raft of issues in respect to its merger with Health Super, consideration of divestment had slipped down the order of priorities. As newspaper editorials focused on the irony that a fund that promoted that it ‘cared for the carers’ was investing in tobacco consideration of the issue became a priority.
First State Super is not the first fund to divest from tobacco. Funds such as Local Government Super divested many years ago. One of the divers of change of opinion around the role of tobacco is Portfolio Holdings Disclosure. We are currently waiting for regulations to implement the legislated requirement that super funds disclose to members their investments. Once implemented, Portfolio Disclosure will mean that superannuation funds have nowhere to hide in terms of their investments. It will be easy for activists to aggregate fund data to produce consolidated data on the amount that the superannuation industry invests in any particular company or group of companies. We should not fear this. But it will mean that both as individual funds, and as an industry, we need to be prepared to explain why we invest.
For funds that have divested from tobacco there does not appear to have been a financial costs. Funds have found that they have been able to replace tobacco investments with investments with similar attributes – Coca Cola and Pepsi for instance demonstrate inelastic demand and target emerging markets but without the deaths.
One of the features of Australia’s superannuation system was that in establishing the legislative framework for the Superannuation Guarantee the Federal Government quite deliberately did not overly restrict the investments of superannuation funds. It is worth recalling APRA’s February 2001 clarification of the SIS Act outlining a set of Principles. The Principles state that a trustee should exercise care when considering investments to ensure that the provision of retirement benefits for members is the overriding consideration behind the investment decision. “However, the situation may arise where a properly considered and soundly based investment provides “incidental” advantages to members or other persons which could suggest that the fund is maintained, in whole or part, for an improper purpose.” The Principles go on to describe that “such incidental advantages would not necessarily, in isolation, amount to a breach of the sole purpose test. For example, investment in a well-researched and commercially sound project might incidentally create employment opportunities for members; and It is open to trustees to develop features of their fund which add value to, or differentiate it from, other funds.”
There has been little focus on the concept of ‘incidental advantage’ in the broader debate about fiduciary duties. However in the context of a legislative environment that does not restrict investment, there is no legislative and regulatory restrictions so long as investments were made for the purpose of providing retirement benefits.
This may represent a new chapter for responsible investment. Many Australian superannuation funds have become signatories to the United Nations Principles for Responsible Investment. Whilst most attention is placed on engagement activities and ESG integration the PRI consist of six principles. Principle 6 states that signatories will ‘report activities and progress towards implementing the Principles’. For many funds this Principle has been interpreted as reporting to the PRI secretariat about progress implementing the Principles. However if you go back to the original guidance that was developed to assist interpretation it is clear that the founders of the PRI intended that reporting would also be to stakeholders and beneficiaries. Specifically the guidance on Principle 6 suggests that signatories can ‘communicate with beneficiaries about ESG issues and the Principles’ and ‘make use of reporting to raise awareness among a broader group of stakeholders.’
Portfolio Holdings Disclosure is likely to provide the impetus for superannuation funds to turn their attention to reporting their ESG activities to an external audience. Over the next decade superannuation will become increasingly competitive. As funds fight to recruit and retain members an active approach to communicating responsible investment may become an asset.
The superannuation industry, and indeed pension funds globally, is unique in that it has been able to largely escape the demand for corporate social responsibility or sustainability reporting. Whilst a large proportion of listed corporations produce their own sustainability reports, or report in some form on non-financial issues, the reporting by superannuation funds on their own activities is sporadic. Ac super funds increase their engagement with members there will come a time when it is the norm for superannuation funds to produce a sustainability report that provides details of what the fund invests in, how it engages and how it contributes positively to society.