Super funds free to pursue sustainable investing says global consultant
New Russell paper assures superannuation trustees they can develop practical strategies to incorporate Sustainability concepts into their funds
Sydney, 11 October 2007 – Trustees of Australian superannuation (super) funds should feel empowered to embrace a more positive approach to Sustainable investing, challenging conventional wisdom that a range of practical and legal impediments stand in their way -- according to a major new research paper by leading investment consultant Russell Investment Group.
To be formally released at a Russell Research Roundtable for clients in Sydney today, the research paper reviews longstanding impediments to Sustainable investing - such as whether Sustainable investment strategies constrain investment returns and compromise fiduciary responsibility - and suggests that new research and evolving market practices have removed these traditional roadblocks.
Written by Russell Director of Capital Markets Research, Scott Donald, and Russell Analyst Nicholas Taylor, the paper entitled, “Sustainable Investing: Marrying Sustainability Concerns with the Quest for Financial Return for Superannuation Trustee” (September 2007) observes that Australian super fund trustees are coming under increasing public pressure to take Sustainability factors (such as the Environment, Social & Governance) into account in their investment strategies.
The paper reviews an 'exhausting but not exhaustive' list of more than 40 empirical studies into the performance of ethical, SRI and Sustainable investing approaches and concludes that: "There is no necessary performance penalty from pursuing a sustainable approach; and there is unlikely to be a performance premium from pursuing a sustainable investing approach when account is taken of appropriate risk and style effects."
Importantly, this finding addresses the core concern that a negative performance impact from Sustainable investing would compromise trustees' fiduciary responsibility to act in their member's best interests. Speaking at the Russell Research Roundtable, Scott Donald said that trustees have historically struggled to marry their concerns about Sustainability with their important legal responsibilities as trustees of Australia’s $1.3 trillion superannuation nest egg.
“Whilst attention to such sustainable investing has traditionally been deemed inappropriate for fiduciary decision-makers, we are now seeing a global effort to recognise the interests of a wider range of stakeholders and to incorporate timeframes longer than is common in the investment management industry,” Donald stated.
Mr Donald said there are now better, more compelling ways for fund trustees to address Sustainability concerns without violating legal requirements or compromising the quest for financial return. Some of these, such as proxy voting and informal engagement with management, send important signals to corporate management without the need for more heavy-handed, and ultimately less effective, strategies such as exclusionary screens and the “Wall Street Walk”.
“Institutional investors and fund managers are often accused of having a narrow and short-term perspective. This is not necessarily their fault. The institutional structure of markets reinforces this orientation in a number of ways, to the detriment of the financial system as a whole,” he said.
Mr Donald noted, however, that the Parliamentary Joint Committee on Corporations and Financial Services, as recently as June 2006, questioned the financial definition of ‘best interests’ and called on the Australian Prudential Regulation Authority (APRA) to provide guidance on the legislation for trustees. “In Australia, trustees must act both in the ‘best interests’ of their members and satisfy the ‘Sole Purposes Test’. The courts have repeatedly confirmed that best interests in this context means financial best interests and that the sole purpose of a superannuation fund is to provide monetary retirement benefits to its members.”
“Superannuation is a long term investment, both for the individual and for the economy. It makes sense therefore that trustees should evaluate an investment’s long-term sustainability as well as its near-term financial prospects. This is the essence of Sustainable Investing,” Mr Donald concluded.
The full research paper “Sustainable Investing: Marrying Sustainability Concerns with the Quest for Financial Return for Superannuation Trustee” (September 2007) is available by contacting the director of sales or client representative on 02 9229 5111. An accompanying Russell Forum Paper: "Sustainable Investing Part A: Definitions, Demand and Decisions" is also available on request.
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