Thinking | 25 November 2020

Super fund Rest settles ‘groundbreaking’ lawsuit over climate change risk

By Anne MacNamara, Adrian Verdnik and Ashlee Johnson

Retail Employee Superannuation Trust (Rest) has settled a lawsuit brought by member Mark McVeigh over its disclosure of the impact of climate change risks on the fund. We look at how the case made it to settlement and consider the potential implications for the superannuation industry – particularly on trustee duties – from this pre-hearing settlement. The case settled shortly before the hearing was set to begin on 2 November.

The settlement falls short of establishing a legally binding precedent that superannuation trustees should take additional steps to consider and report on the risk climate change poses to its investments and financial condition. However, it may well be a harbinger of the changing face of the duties a superannuation trustee owes to its members.

McVeigh said the settlement was ‘groundbreaking recognition’ of the risk that the climate crisis poses to the economy and society.

Case history: alleged breaches of the Superannuation Industry (Supervision) Act 1993 and the Corporations Act 2001 (Cth)

During 2017, McVeigh, a 23-year-old landscaper, had made a number of information requests from Rest about the impact of climate change on the financial condition and investment performance of Rest. McVeigh claimed that this information was reasonably required to understand the management, financial condition, investment performance and investment portfolio of Rest.

Rest responded to McVeigh’s requests, purporting to identify and provide all the requested information. However, McVeigh alleged that the response was unsatisfactory on the basis that it did not fulfil the requirements of section 1017C of the Corporations Act 2001 (Cth) (Corporations Act) nor did it accord with Rest’s duties as a superannuation trustee. On 23 July 2018, McVeigh filed proceedings in the Federal Court of Australia.

Specifically, McVeigh alleged that Rest’s response and approach to climate change risk disclosure resulted in breaches of:

  1. its covenants under section 52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act);
  2. its disclosure obligations under section 1017C of the Corporations Act; and
  3. its equitable fiduciary duties.

McVeigh did not seek financial compensation, but rather sought declarations from the Court that Rest had breached certain SIS Act covenants and an equitable injunction that Rest refrain from ongoing breaches. In the alternative, McVeigh sought a declaration that Rest was obliged to provide certain information and had breached its disclosure obligations under the Corporations Act and SIS Act and sought an injunction requiring Rest to provide the requested information.

SIS Act covenants: trustee's duties and putting beneficiaries' interests first

The governing rules of a superannuation fund are deemed to include a number of covenants by section 52 of the SIS Act. The covenants that McVeigh alleged were breached by Rest were:

  • section 52(2)(b): to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments;
  • section 52(2)(c): to perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries; and
  • section 52(2)(j): to allow a beneficiary of the entity access to any prescribed information or any prescribed documents.

McVeigh alleged that to be compliant with these covenants, Rest should have required its investment managers to compile and disclose their climate change risk information. Further, he alleged that Rest should have taken steps to inform senior management about its climate change risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Settlement: climate risk to be assessed as financial risk

The parties settled the proceedings shortly before the hearing that was scheduled for 2 November 2020. In a statement published by Rest, the terms of the settlement were disclosed as follows:

  • Rest will take further action to ensure that the investment managers it engages take active steps to consider, measure and manage financial risks posed by climate change and other relevant Environmental, Social and Corporate Governance risks;
  • Rest will implement a long-term objective to achieve a net zero carbon footprint for the fund by 2050;
  • Rest will measure, monitor and report outcomes on its climate related progress and actions in line with the recommendations of the TCFD;
  • Rest will encourage its investee companies to disclose in line with the TCFD recommendations;
  • Rest will publicly disclose the fund’s portfolio holdings;
  • Rest will enhance its consideration of climate change risks when setting its investment strategy and asset allocation positions, including by undertaking scenario analysis in respect of at least two climate change scenarios (including one scenario consistent with a lower-carbon economy well below 2oC this century);
  • Rest will actively consider all climate change related shareholder resolutions of investee companies and otherwise continue to engage with investee companies and industry associations to promote business plans and government policies to be effective and reflect the climate goals of the Paris Agreement;
  • Rest will conduct due diligence and monitoring of investment managers and their approach to climate risk;
  • Rest will continue to develop its management processes and implementing changes to its climate change policy and internal risk framework, which apply to all of the fund’s investments, to reflect the above; and
  • Rest will seek to require that its investment managers and advisers comply with the above.

Potential implications: legal duty to manage climate risk?

While the settlement falls short of establishing a legally binding precedent that superannuation trustees should take additional steps to consider and report on the risk climate change poses to its investments and financial condition, it may indicate that change is afoot for the scope of superannuation trustee’s duties to members.

The extensive reach of superannuation industry investment, not only encompassing direct investment but also investment in shares, would mean that an enhanced duty to report on the climate risks of its investments may have a resounding impact on the investment landscape. For example, a superannuation trustee may require companies in which it owns shares to compile and report on its own climate change risk and activities to comply with its obligation to fund members.

It remains to be seen whether this settlement will set a new benchmark for superannuation trustees in their approach to climate change risk. Trustees would be wise to keep abreast of where things progress from here.

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