The government's latest proposed reforms to superannuation have raised concerns that they might impinge on funds' ability to use ESG investing strategies.
In Tuesday's budget speech, Treasurer Josh Frydenberg introduced the Your Super, Your Future package, including a new duty on trustees to act in the best financial interests of their members.
Treasury said that the "measure will remove ambiguity on how superannuation trustees should be spending members' money," and specifically cited examples such as marketing and advertising campaigns in the paper published in support of the budget announcement.
The government's proposed reforms were met with questions from the financial services industry, relating to the necessity of legislative fixes, as well as the status of other regulatory initiatives that are tipped to increase investment transparency, such as Portfolio Holdings Disclosure.
There is also an undercurrent of concern that an unspoken aim of the Your Super, Your Future reforms is to curtail ESG-related activity.
Maged Girgis, a partner at Minter Ellison who specialises in financial services law, noted that the existing legislative framework governing trustee duties - the Superannuation Industry (Supervision) Act - already contains specific requirements for trustees.
"You've got the best interests duty, which is a duty to exercise your powers and functions in the best interests of beneficiaries - legally, that's a duty to put members first," Girgis said. "Legally, trustees have a duty to promote the financial interest of MySuper and choice members, particularly having regard to net returns after taxes and fees."
In the government's statement supporting the budget speech, the onus on demonstrating compliance with the new duty "will be reversed so that trustees must establish that there was a reasonable basis to support their actions being consistent with members' best financial interests."
"That's going to put a lot of pressure on governance, I would have thought, to make sure the paper trail is there and the processes are strictly followed in order to demonstrate that," Girgis observed.
Girgis noted that the focus appears to be on the ways in which funds are managed, not necessarily on how fund are invested.
Curiously, the government reforms relating to transparency did not include mention of Portfolio Holding Disclosure. The Australian Securities and Investments Commission (ASIC) last year announced that the long-deferred deadline for the first reporting date on PHD was to be 31 December of this year.
However, in April ASIC said it would defer the launch again due to the impacts of COVID-19. A spokesperson for ASIC told FS Sustainability that the new deferral date has not yet been set and will be announced via ASIC's website.
The majority of major superannuation funds are not disclosing their portfolio holdings, according to research from Rainmaker Information.
Rainmaker's just completed 2020 Super Fund Portfolio Holdings Study found only 27 major super funds, about one-quarter, practice PHD. Of the superannuation funds that do disclose their portfolio holdings, most were not-for-profit (NFP) funds.
In the wake of Tuesday's speech, concerns have been raised that the intent of the Your Future Your Super reforms is to curtail ESG investing and responsible investment activity by superannuation funds.
Senator Jane Hume on Thursday clarified the government's latest reforms in relation to ESG investing.
Hume was speaking at a Financial Services Council (FSC) event about the Your Super, Your Future package. As reported by sister publication Financial Standard, when asked whether the new best interests duty will mean an end to ESG investing, Hume replied "no" and said the government does not want to be that specific or stop anyone from doing business.
"There's plenty of research out there that ESG investing is a pretty basic risk filter," Hume said.
"We don't want it to be prescriptive... Trustees already have a higher responsibility; they already have a fiduciary duty. This just frames that duty as acting in the best financial interests of members, not just the best interests of members."
Responsible investment strategies and approaches are "entirely consistent with best interest duties," said Simon O'Connor, CEO, Responsible Investment Association Australasia (RIAA).
"The precedent is that decisions must be aligned with best interest duties," O'Connor said. "Trustees are already considering their obligations and duties, and certainly responsible investment absolutely goes to the core of delivering better returns and managing risk consistent with the obligations and duties of trustees."
O'Connor reiterated previous statements that one way to empower member knowledge is for ASIC's PHD regime to commence.
"It's a missed opportunity not to be focused on that," he said.
"How funds are spending the money as opposed to what they're investing seems to be the focus of Treasury," O'Connor said. "It's really important for trustees to have the ability to use the full suite of investment approaches to deliver best outcomes for their members as the members of one fund are going to be quite different to the beneficiary groups of another.
"We would not want a government curtailing the ability of trustees to reflect the interest of beneficiaries."
Other government agencies are currently revising guidance about use of ESG approaches in investment processes. The Australian Prudential Regulation Authority (APRA) is currently updating SPG 530 - Investment Governance regarding ESG issues, which will include consultation on climate-related stress testing and related prudential guidance. In the wake of COVID-19, APRA announced that it would suspend its planned 2020 agenda of policy and supervision initiatives until at least 30 September 2020, however an APRA spokesperson confirmed to FS Sustainability that the consultation draft for SPG 530 will be circulated "sometime early next year."