With their vast assets and long investment horizons, superannuation or super funds have a critical role to play in supporting Australia’s decarbonisation ambitions. Arguably, the act of transitioning the Australian economy to net zero is consistent with the requirement to act in members’ best financial interests. However, there is a natural conflict in what ‘members best interests’ means when it comes to ESG considerations.

Individuals nearing retirement require immediate financial stability and will prioritise short-term returns, while those at the start of their career require longer-term sustainable investments prioritising a world that is viable to retire into. To meet these competing needs, it is necessary to strike a balance between short-term financial goals and long-term sustainability, requiring an investment strategy that is multi-faceted. Yet this lofty goal can be a hard line to sell when stakeholders continue to push for short-term gains. 

This article explores five challenges Chief Risk Officers (CROs) should be aware of as they assist super funds to secure long-term sustainable investments.

Sustainability has emerged as a pivotal factor in investment decisions, with stakeholders demanding a focus on environmental, social, and governance (ESG) criteria. Like all investors, super funds are under increasing pressure to consider ESG in their decisions, with expectations particularly high given their longer-term approach which is considered to be ideal to invest in the infrastructure required for a low-carbon economy. 

Even so, the need to deliver short-term results often conflicts with the long-term goals of sustainable investing. This dynamic presents multiple challenges for investors seeking to align financial returns with sustainable practices – and super funds are no exception.  

1. Short-term return pressures

The pursuit of short-term returns can be at odds with the long-term benefits of sustainable investments. As a result, companies may need to prioritise investments with short-term returns against longer term sustainable investments, inadvertently leading to negative environmental outcomes and reputational damage in the long run. We also continue to see budgets for long-term sustainability related projects being cut in favour of short-term projects that have fewer sustainability benefits. 

This issue is also at play within superannuation fund investment strategies. Longer-term projects come with greater delivery risk and uncertainty.  Quantifying sustainability benefits, especially in the short term, continues to be difficult and requires different data to inform these decisions.

2. Lack of relevant data

Getting access to relevant sustainability data can also be problematic. CROs need to both understand the financial performance of sustainable investments and find a baseline to assess the impact of sustainability initiatives, such as transitioning towards net zero. 

We see super funds and investors continuing to grapple with ESG data across their various investments.  The lack of robust data sets and the use of proxy information can create further short-term risk, as representations made to members about certain types of investment are in danger of being re-classified.

3. Regulatory uncertainty

Changes in regulations can impact the financial viability of sustainable investments and add complexity to decision-making processes. Not only are regulatory frameworks around sustainability constantly evolving, but they are also not always tailored to super funds. This creates uncertainty for those making investment decisions.

While the International Sustainability Standards Board (ISSB) and Australian Accounting Standards Board (AASB) are pushing to standardise climate reporting, it will be some time before we have a comprehensive sustainability taxonomy across the system. Thus, a fund manager investing in sustainable agriculture may still face uncertainty about future government policies on land use and water conservation, affecting the long-term prospects of the investment.

4. Stakeholder expectations

Investors committed to sustainability still need to meet the expectations of diverse stakeholders. Balancing the demands of shareholders, members, regulators, employees, and communities while pursuing long-term sustainability goals requires alignment to business strategy.

With a shifting demographic, younger members are calling out for greater investment in long-term, sustainable options.  However, not at the expense of returns.  The Your-Future-Your-Super performance test compounds the challenge, creating the real potential that subjecting all funds to an annual performance test will potentially misalign benchmarks.

5. Limited internal expertise

Building internal expertise in sustainability can be a significant challenge for any organisation. Navigating the complexity of ESG factors and the evolving landscape of sustainable finance requires specialised knowledge and skills that may not be available internally.

A super fund seeking to integrate sustainability into its business may struggle to recruit and retain professionals with the type of expertise in ESG needed to balance the short- and long-term needs of the business.

CROs need to help super funds understand that short-term pressures and long-term sustainability are not mutually exclusive decisions – developing a sustainable business model is a balancing act. Prioritising ESG within an overall investment strategy is essential to create value from opportunities and mitigate ESG risks. This is how to balance financial performance over the short and long term. 

Getting to this point will require super funds to acquire an organisation-wide capability to develop and deliver a sustainable investment strategy, requiring ESG skills and data to enable decision-making aligned to regulations and stakeholder expectations. 

Baringa’s advisory practices play a crucial role in helping investors and CROs navigate the complex challenges of sustainability in the long term. By partnering with Baringa, superannuation CROs can access specialised knowledge, strategic guidance, and actionable insights to enhance their approach to managing sustainability related risks across their business.

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