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Self Managed Super Fund (SMSF) Article
Self Managed Super Funds and Socially Responsible Investing

By Tony Negline.

This article may be out of date.

30th September 2009

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Super fund trustees must act in their fund's beneficiaries best interests at all times especially when investing their trust's assets.

It may come as a surprise to many small fund trustees to learn that the Federal Government believes that super fund trustees are failing to act in their beneficiaries' best interest by not using Socially Responsible Investing (SRI), sometimes called Environmental, Social and Governance (ESG) investing.  "ESG issues pose a core investment risk with the potential to impact heavily on long-term viability of investments," said Senator Sherry, the Federal Minister formerly responsible for superannuation.

"ESG and other extra-financial factors should be incorporated into the investment decision-making process of superannuation trustees," he said.

So what is SRI?  SRI is not one type of investment technique.  There are many different SRI investment styles including:

Some SRI managed funds use some or all of the above investing styles and some investment managers may use their shareholding voting rights to promote their SRI investment principles.

How does a super fund trustee determine what their beneficiaries best interests are?

The Courts have addressed this issue in a few cases.  Arguably the most famous decision involves Arthur Scargill who for many years was the leader of the UK National Union of Mineworkers (NUM) and also a NUM representative trustee for the mineworkers’ pension fund.  During the 1980s, Scargill’s lead massive and prolonged coal miners’ strikes in an attempt to overthrow the Thatcher Government.

In 1983 all the NUMs trustees of the mineworkers' pension funds refused to approve investments which contained exposure to international and coal-competing assets.  They argued that such investments were “to the detriment of coal and would be against the interests of the … beneficiaries”.

All the pension fund's employer trustees disagreed and, after much toing and froing between both sides, sought a judicial resolution of the resulting stalemate.

The following extracts from the written judgement in the case are highly relevant to the understanding what is meant by the beneficiaries best interests:

The judge in this case approvingly cited another case known as Buttle v Saunders in which a property had to be sold and the trustees had accepted an offer but the actual sale had not been completed when another higher offer was made.  The trustees rejected the later offer because they felt honour bound to accept the first lower offer.  "The duty of trustees to their beneficiaries may include a duty to 'gazump' however honourable the trustees," said the judge in the Scargill case in relation to Buttle v Saunders.

It would seem therefore that trustees need to put their personal views and ethics to one side when deciding how their trust monies are invested and therefore acting in their beneficiaries financial best interests.

At least 79 large super funds have signed up to the United Nations Principles of Responsible Investment.  This means that these funds have made undertakings to incorporate ESG issues into analysis and decision making processes, be active owners and seek appropriate disclosure from entities in which they invest.

Sherry has asked the Australian Prudential Regulation Authority to review its guidance to super fund trustees asking that trustees to take greater account of SRI in the investment process.  At the time of writing the APRA had not released the revised guidance to super fund trustees.

In February, Senator Sherry announced that the Federal Government would provide $2.5m to help establish a Responsible Investment Academy.

The new Minister responsible for superannuation has said that he does not favour mandating where super funds invest.

Some superannuation lawyers say that 25 or 30 years ago some people might have agreed with Scargill but most people now would think his objections are quaint.  Perhaps ESG investing will suffer the same fate in the near future.

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