After investor sues, major pension fund agrees to disclose climate-related financial risk and transition to a net zero emissions portfolio by 2050

by Karen Torrent, Policy Counsel

Published on November 09, 2020

After investor sues, major pension fund agrees to disclose climate-related financial risk and transition to a net zero emissions portfolio by 2050

A historic settlement was announced on November 2nd in a first-in-the-world case, after an investor sued a major pension fund for failure to protect his retirement savings against climate-related financial risks.

The major Australian pension fund, Retail Employees Superannuation Trust (“REST”) agreed that the financial risk of climate change is material to its investors and should be disclosed and to mitigate these risks. REST’s portfolio is valued at $39 billion US and has two million investors (or “members”).  Australia’s pension industry is valued at $2.9 trillion, the world’s fourth-largest retirement-savings pool.  Although not precedent-setting in terms of caselaw, this settlement may be a catalyst for additional climate litigation against not only pension funds but other financial institutions, bank holding companies and investment advisors that have fiduciary duties to their members.

In 2018, Marc McVeigh, an Australian fund member sued REST alleging a breach of fiduciary duty by the fund and its board for failing to adequately disclose and assess the impact of climate-related financial risk on the fund’s investments. Mr. McVeigh who has been investing in the fund since 2013 and is currently 25 years old was concerned about the viability of his investments over the long-term.  A superannuation trust is similar to U.S. pension funds and 401(k)s;  however, unlike the U.S., participation in these “super funds” is mandatory for all Australian employees.

Mr. McVeigh is right to worry about the impact of climate-related risks on the future value and makeup of his investments in the fund. Like the rest of the world, Australia is experiencing more frequent and costly extreme weather events – floods, typhoons, drought, and wildfires – that are expected to increase as temperatures continue to rise.  In fact, Australian wildfires declared among the “worst wildlife disasters in modern history” according to a recent World Wide Fund for Nature report. The report said more than 46 million acres were scorched and estimated that 1.25 billion animals died or injured.

In addition to physical damage, the actual and potential disruptive impacts of climate change on social well-being, economic development and financial stability of current and generations is well documented and expected to amount to trillions of dollars of loss.  The international business and financial community have recognized the various risks climate change poses to society and the global economy.

Conservative estimates see unabated climate change leading to global costs equivalent to losing in-between 5 to 20% of global gross domestic product (GDP) each year. The U.S. itself has sustained over $1.75 trillion in costs from over 250 climate-related disasters. Between 2015 and 2019, the economic losses attributable to climate change exceeded $500 billion. It has been estimated that with continued business-as-usual emission paths, asset values at risk from 21st century climate change may be as high as $24.2 trillion.

In Australia and around the world, the responsibility for determining how financial assets are invested lies ultimately not with the asset-owner, but rather a small number of principals and their agents. Australia is one of a number of jurisdictions around the world that require these investment decision-makers, particularly in the pension context, to disclose the extent to which they take environmental, social, and corporate governance (ESG) into account.

On November 2, 2020, just days prior to the start of the trial, REST settled the historic lawsuit, committing to a net-zero emissions portfolio by 2050 and public disclosure of the carbon intensity of its portfolio in the interim.  In a public statement, Rest said that “climate change is a material, direct and current financial risk to the superannuation fund.”

McVeigh’s case is part of the surge in climate litigation in recent years, as investors demand disclosure and actions by governments and companies to address global warming that is fueling increased natural disasters and threaten the financial value of their investments. In countries that require investment decision-makers to disclose ESG considerations – UK, Australia, France, Canada, Germany, and Italy – more litigation like the McVeigh case could increase against financial institutions that have fiduciary duties to its investors.  (Note: The U.S. does not have an ESG requirement and in fact currently discourages the use of ESG factors and ESG funds in ERISA funds.)

As this litigation continues, whistleblowers with material information relating to the disclosure of ESG factors can assist governments and investors in assessing and mitigating risk in investments in financial institutions to insure a secure retirement for their citizens.  Currently, Europe is in the process of implementing increased whistleblower protections. Australia has also implemented protections for private sector whistleblowers recently. However, these programs are not yet as robust as existing laws in the U.S. with significant transnational applications.

In the U.S., far reaching whistleblower programs incentivize needed transparency and the disclosure of material climate risk information. Since the enactment of the Dodd-Frank Act in 2010, whistleblowers have played a central role in exposing fraud in financial and securities industries. There is every reason to believe that whistleblowers can assist in exposing hidden climate-related risks these countries’ ESG climate disclosure regimes.

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