Climate change and the fiduciary duties of pension fund trustees – lessons from the Australian law

Leading financial market participants increasingly recognise that issues associated with climate change present significant – if not unparalleled – financial risks. Regulatory, technological and social responses present particular issues for investment strategy, asset valuation, risk assessment and disclosure by institutional investors. However, governance literature has historically characterised climate change as a non-financial issue, at least over mainstream investment horizons. Accordingly, there has been little academic analysis of whether trustee directors are compelled, rather than permitted, to have regard to climate change risks. This paper seeks to advance the literature by examining the obligations of pension (or ‘superannuation’) fund trustee directors in Australia. The analysis focuses on the obligation to apply due care, skill and diligence under section 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It concludes that a passive or inactive governance of climate change portfolio risks is unlikely to satisfy their duties: whether the inactivity emanates from climate change denial, honest ignorance or unreflective assumption, strategic paralysis due to impact uncertainty, or a default to a base set by regulators or investor peers. Considered decisions to prevail with ‘investment as usual’ may also fail to satisfy the duty if they are based on outdated methodologies and assumptions.