November 2020

Rest Super recently settled a litigation dispute with a Brisbane-based member around its fiduciary duty in disclosure and consideration of climate change risks within its portfolios. The member claimed Rest had breached the Superannuation Industry (Supervision) Act. He also claimed the fund had failed to provide adequate material for the member to understand their position on climate risk, mitigation strategies and other risks under the Corporations Act.

The case raised the importance of disclosure around underlying investments with superannuation funds even beyond those brought up by the threat of climate change. Super funds need to be able to plainly explain their strategic and investment decisions regarding their portfolios, particularly when they market those strategies to members based on the understanding that the underlying investments act in the way they purport to. As ESG and climate change mitigation-style strategies become more important and widely accepted by members as both appropriate and necessary, the need for funds to relay information about them in layperson terms, and in further detailed granularity, will be important into the future.

This particular case also suggests that even beyond individual strategies, super funds should be taking steps to mitigate certain risks across their whole business. With 1.9 million members it is unlikely that every member’s desires and needs will be met when it comes to new, old or assumed risks. This mitigation across an entire business will no doubt add a layer of cost to portfolios that many members will not want, contrary to the notion brought forward to the Federal Court by the aforementioned member. It does seem prudent that individual portfolios and strategies that purport to act in a certain way, or take in certain risk-mitigating strategies, should endeavor to do what they say.

The court challenge and settlement by Rest comes at a time where greater scrutiny and importance has been placed on climate-related issues globally. One of the world’s largest money managers, Blackrock, and its founder Larry Fink has described the situation as a ‘seismic reallocation of capital‘, and called for a climate risk overlay across long term investment strategies. Surely this is the takeaway for superannuation funds and money managers too as they review the legal risk now created by this case against Rest.