Trustee standards set by Rest case

Earlier this month the Australian superannuation fund, Rest, settled a case with one of its members, Mark McVeigh, who claimed the fund breached its duty by not properly considering the risks posed by climate change. Here, McVeigh’s lawyers write exclusively for Top1000funds.com and explain the significance of the case for pension funds around the globe.

Minimum trustee standards set by Rest climate litigation settlement

The recent settlement of a landmark legal action brought against the trustee of the Retail Employees Superannuation Trust (Rest) by 25-year-old member Mark McVeigh holds important lessons for pension fund trustees.

Mr McVeigh’s claim alleged that Rest had breached its statutory and equitable duties to members of the fund, including by failing to act with due care, skill and diligence, and in members’ best interests, by not properly considering the risks posed by climate change to the fund’s investments.

In a public statement, Rest acknowledged that climate change poses a material, direct and current financial risk to its superannuation fund. Rest has also committed to continue developing its management processes for dealing with the financial risks of climate change. Steps that Rest is taking include:

• setting a goal to achieve a net zero carbon footprint by 2050;
• measuring, monitoring and reporting outcomes on its climate related progress and actions in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);
• publicly disclosing the fund’s portfolio holdings;
• incorporating climate scenario analysis into its investment strategy and asset allocation decision-making; and
• advocating companies and governments to operate in line with the goals of the Paris Agreement.

While the eleventh-hour settlement means there will be no judicial determination, it is illustrative of a minimum standard of what a trustee must do when its actions questioned. The outcome sends a weighty signal to superannuation trustees in Australia as well as to pension funds around the world.

It is no longer appropriate (if it ever was) for funds to delegate the management of what Sir Nicholas Stern described in his 2007 review for the UK government as “the greatest market failure the world has ever seen”. Prudent trustees should implement top-down systems and processes to ensure that the financial risks of climate change are actively identified and managed, supported by rigorous reporting and disclosure regimes.

It is clear that the industry’s approach to climate change has evolved significantly, even since 2018 when Mr McVeigh commenced his hard-fought action against Rest.

The settlement follows years of signals from regulators and market players that it is incumbent upon funds to address the financial risks of climate change. In addition to the Stern review, in 2015 the Paris Agreement—arguably the biggest market signal in history—was reached. In early 2017, the Australian Prudential Regulation Authority noted that many of the financial risks posed by climate change “are foreseeable, material and actionable now”. Also in 2017, an influential opinion by leading barrister Noel Hutley SC emphasised the need for trustee directors to pay closer attention to climate change. Since then regulators and lawyers have only strengthened their resolve.

The trend towards better management of climate change risks was supported by the advent of sophisticated tools and procedural roadmaps—particularly the recommendations of the TCFD, which were published in final form in June 2017. Rest’s pledge to develop its processes for measuring, monitoring and reporting climate-related outcomes in line with the TCFD recommendations is representative that a prudent trustee will follow the TCFD’s advice.

Although Mr McVeigh’s legal action was commenced in Australia, the case has been followed closely by funds around the globe. It highlights both the increased scrutiny that funds face, and the tangible actions that they can take, when it comes to managing the risks posed by climate change.

It highlights the continuing divide between institutional investors attempting to keep their members’ money safe, and the Australian government, which at the time of writing, has so far refused to commit to a net zero by 2050 target or take meaningful steps to reduce emissions.

Funds are now fortified in advocating for better government policies, sensibly understanding that poor government policies represent a transition risk to investments. Those funds advocating for better outcomes are merely acting in members’ best financial interests.

Efforts by the Australian and US governments to marginalise climate change as a peripheral ESG issue beyond the remit of trustees represent a fundamental misunderstanding (and mischaracterisation) of climate change risk. No matter how much any government would like to divert funds’ focus away from climate change, the reality is that economies are already in transition and there is significant momentum to increase the pace of change. In such circumstances, climate change represents a material financial risk and funds are wholly justified in taking steps to manage it, including advocating for more proactive government policy.

The hard truth is that any remaining Board and Committee members who misunderstand climate risks and obstruct action on climate change will be shown the door.

As the dust settles, industry insiders tell us they expect that within 6 months most, if not all, Australian superannuation funds will have 2050 net zero targets. More funds will ramp up existing commitments, implementing a minimum 45% portfolio wide emissions reduction target by 2030 on 2010 levels in line with the umbrella organisation IGCC. Trustees are in a race to make shrewd long-term investments in renewables in addition to avoiding losses. The latter will be achieved, in part, by funds completing their divestment of coal companies and continuing to sell down gas and oil producers.

Policies of universal investors like Rest flow through to investee companies and fund managers. They all now have no real choice other than to align business plans and portfolios with ambitious climate pathways and rapid decarbonisation.

James Higgins, Ling McGregor and David Barnden are lawyers at Equity Generation Lawyers, the firm representing Mr McVeigh.