Superannuation trustees in Australia have an obligation to act in the best interests of beneficiaries, which includes the management of financial risks posed by climate change. Equity Generation Lawyers reaffirms this and provides updated guidance on the steps trustees must take to comply with regulations.

Regulatory bodies, superannuation trustees, and investment consultants have publicly stated that climate change presents a systemic financial risk that must be managed by a trustee. Quantitative analysis shows that investment portfolios could decline by 2% per year without further action by trustees. The Trustee should thus assess the risk posed by climate change to its portfolio.

To understand the risk posed by climate change, a superannuation trustee should take a thorough approach by commissioning expert advice to apprise itself of the financial risk brought by climate change, with the advice refreshed frequently. The Trustee should also assess the structure of any identified risk and whether it is diversifiable. To manage risk, the Trustee should weigh whether risk aligns with the investment objectives of an option. Superannuation trustees should ensure their processes for managing financial risk are capable of identifying and managing the financial risk posed by climate change and seeking appropriate advice, especially when diversification may not be a possibility.

The Board has a responsibility to ensure that its processes are capable of understanding and managing risks posed by climate change, which means allowing such processes to engage in emerging standards and practices that inform environmental, social and governance (ESG) considerations. The Board should also ensure advisors such as accountants, actuaries, and consultants qualified to do so, identify the financial risk posed by climate change.

Superannuation trustees need to ensure their processes are capable of identifying and managing financial risks associated with climate change, to which they must adapt in a manner that conforms with the degree of the risk posed. Trustees must also consider any exposures, such as a portfolio-wide net-zero emissions target, to any financial risk posed by climate change when determining an appropriate level of diversification for an investment strategy. Trustees must also use climate change scenario analysis to inform stress-testing underpinning investment selection processes.

Overall, superannuation trustees must ensure they are capable of identifying and managing the potential financial risks posed by climate change and ensure their investment governance framework reflects key ESG considerations.