Michael Aked
Scientific Beta, a trailblazer in managing net zero portfolios in Europe, is now collaborating with superannuation funds to extend its expertise to the Australian market. This objective is to empower Australian super funds with the tools and knowledge required to effectively navigate the complexities of decarbonising their portfolios while adhering to the demanding Your Future, Your Super (YFYS) regulations – a multi-faceted and urgent endeavour.
Superannuation funds in Australia, including some of the nation’s largest, have made ambitious commitments to align their investments with net zero objectives. In Europe, the regulator has clear rules that must be fulfilled if an investor is going to claim such lofty net zero goals, best embodied in the EU Carbon Transition Benchmark regulatory framework. The core commitment of the European framework requires an annual reduction in the carbon intensity of pension funds’ equity portfolios of 7%, a goal that presently appears challenging for Australian superannuation funds to attain. Many of these funds continue to allocate significant portions of their members’ funds to high-carbon Australian and international companies without making clear to these companies if they do not decarbonise fast enough then divestment must be the repercussion.
Michael Aked, Senior Investment Strategist at Scientific Beta, stated that the EU CTB framework is being adopted by many investors around the world including in New Zealand.
Mr. Aked emphasised the predicament that super funds find themselves in due to their strict adherence to Your Future, Your Super (YFYS) performance testing.
“Super funds are essentially walking a tightrope. YFYS performance testing imposes tracking error targets that tether them to high-emitting Australian companies, hindering their ability to achieve both satisfactory returns and an acceptable rate of decarbonisation,” explained Mr. Aked.
One unintended consequence of YFYS regulations is to restrict fund investment behaviour to continue to fund high carbon emitters regardless of their ESG performance.
Unlike Europe, where low-carbon benchmarks are readily available, the absence of a YFYS-compliant low-carbon benchmark in Australia leaves super funds with few viable options. Mr. Aked outlined two paths available to super funds:
- Comply with YFYS: Fulfil their YFYS obligations but risk allegations of greenwashing for making net zero commitments they may not fulfil.
- Pursue net zero commitments: Invest in line with their net zero commitments but prepare for potential repercussions if they fail the YFYS performance test, which could lead to significant regulatory action.
“This presents an exceedingly challenging scenario for super funds, as both options expose them to regulatory scrutiny, jeopardising members’ funds and eroding trust,” Mr. Aked emphasised.
Scientific Beta recommends a proactive approach to navigate this dilemma. According to Mr. Aked, the optimal solution is for super funds to publicly commit to a 7% annual decarbonisation targets that requires forced divestment of carbon laggards. Only if Australian companies risk losing capital from our super funds will they see the importance of acting annually and with the required magnitude to meet net zero 2050 goals.
“In essence, super funds can opt to stay the course and employ the coercive power of forced divestment to compel companies to meet their decarbonisation targets, thereby driving meaningful change,” Mr. Aked concluded.
“Scientific Beta’s established track record in Europe positions us to provide invaluable guidance to Australian superannuation funds grappling with the challenges of net zero portfolio management. Our expertise will prove instrumental in assisting them on this critical journey.”