In July, a landmark trial will take place in a Sydney courtroom that could potentially change the way superannuation funds invest Australians’ almost $3 trillion in retirement savings.
- The McVeigh v REST case could set a precedent for the way global pension funds manage climate change
- Experts warn litigation against listed companies relating to climate change will rise in Australia this year
- The private sector may be forced to lead action on climate change ahead of governments
The case, which could set a worldwide legal precedent as to how pension funds manage climate-change-related financial risks, is thanks to a 24-year-old Brisbane-based council worker with an ecology degree.
Mark McVeigh can’t access his super money until 2055 but says climate change impacts are already materialising and, therefore, investors should be acting.
It is this belief that led to his case against $57 billion superannuation fund Retail Employees Superannuation Trust (REST).
Mr McVeigh has alleged that REST has failed to protect his retirement savings from the financial devastation that will flow from climate change.
The case, first brought in 2017, followed Mr McVeigh asking his super fund to provide him with disclosure about what it was doing to mitigate climate-change-related risks.
“Since we launched the case, it’s really snowballed and changed,” Mr McVeigh told ABC News.
“It got way bigger than I ever imagined in 2017.
“Originally the case was about disclosure … but then it brought up further questions about are [REST] taking into account any climate change risks in their assessments?”
The Federal Court will now also have to determine whether the super fund is in breach of its fiduciary duties — that is, its duty to act in the best interests of its members — by not taking enough action to mitigate climate-change-related risks.
“It’s not just the experts who are interested,” Mr McVeigh said.
“Everyone around the world that has retirement savings is interested in how their money is invested, and the way their fund is managing the [climate-change-related] risk.”
If the court agrees that REST has breached its fiduciary duties, it will not only change the way super funds invest people’s retirement savings.
Experts warn it could pave the way for further litigation.
‘World first’ test case for climate risks
Jonathan Steffanoni, partner at superannuation law firm QMV Legal, thinks the case could have ramifications for global pension funds but believes it is unlikely to set a precedent for similar action against company directors.
“It is an important case for super fund trustees as it will focus on their responsibilities when managing investments,” he said.
But Jacqueline Peel, a professor and environmental law expert from Melbourne University, said the case will influence how companies broadly think about how they address climate change risks.
“It’s really the first test case on this issue in the world,” she said.
“If these funds are not thinking about climate change, the assets they are investing in — for example, fossil fuels — could become stranded assets and could put at risk the investment returns of superannuation fund members.”
Professor Peel said since the conclusion of the Paris climate agreement in 2015, litigation had steadily ramped up.
“2020 could be a big year for climate-change-related litigation,” she said, adding that philanthropic groups in Europe were now also backing such litigation globally.
The McVeigh case also comes in the context of greater shareholder action against company directors at AGMs on climate change, and the giants of the financial sector themselves highlighting that climate change is a financial risk.
This week the CEO of the world’s largest funds manager, BlackRock’s Larry Fink, announced the $US1.8 trillion ($2.6 trillion) in assets the fund actively manages will no longer be invested in companies that generate more than 25 per cent of their revenue from thermal coal production.
Mr Fink, who has faced much pressure from climate change activists over the years, told US media that he made the decision not because he was an “environmentalist” but because he was a “capitalist”.
“And my job is, as a capitalist, to help prepare our clients for the redistribution of capital,” Mr Fink said.
McVeigh case could have global implications
Elisa de Wit, a partner at law firm Norton Rose Fulbright specialising in environmental law, believes the legal precedent set in the McVeigh case will potentially have relevance for pension funds, and possibly companies, worldwide.
“Even if McVeigh wasn’t to be successful, there may be commentary [from judges] in the case that could be used by other judges in Australia as well as other jurisdictions overseas,” she said.
Emma Herd is the chief executive of Investor Group on Climate Change, which represents institutional investors with total funds under management of more than $2 trillion.
“When climate change became a financial risk, it became a legal risk,” Ms Herd said.
She thinks the McVeigh case will at least establish the parameters for how others pursue litigation against the private sector.
“I think quite a few people didn’t think that case would get as far as it has,” she said.
The parties in the case are required to attend mediation by April 10 and the case is set for a three-day trial starting on July 20.
Mr McVeigh’s lawyer, Equity Generation Lawyers’ David Barnden, said if McVeigh wins, it may change the way super funds manage Australians’ $3 trillion worth of assets.
“The implications will be felt by pension funds worldwide as investors jostle to sell-down holdings in companies that aggravate climate change or are prone to physical impacts caused by a warming planet,” he said.
REST was also limited in comments it could make but a company spokesman said that as the custodian of almost $60 billion in retirement savings, “managing climate change risks is an important part of REST’s focus on delivering long-term investment returns for our 1.7 million members”.
He said climate change risks are factored into REST’s investment strategy and decision-making process.
“The specific climate-related issues we engage with our investment managers on include carbon foot-printing (in equities), stranded assets, climate-related scenario analysis and exposure to lower-carbon assets,” he explained.
REST also worked with its investment managers and the Australian Council of Superannuation Investors “to engage with the companies and entities we invest in, and to improve disclosure of climate change risks and opportunities”, he added.
Australia is moving towards US-style class actions
To date, climate-change-related litigation in Australia has been focused on the planning and environment space: for example, whether a coal mine should be allowed.
Now it could shift to actions specifically against companies.
Ms de Wit said Australia was at a “tipping point” in the debate about climate change.
“Obviously, the bushfires are going to mobilise peoples’ thinking on this issue and whether the Australian government is doing enough to address climate change,” she said.
“There’s also the potential for community groups and others to take the view that the Australian government isn’t doing enough and look at how they can litigate off the back of that.”
The New York Attorney-General’s office recently tried to sue ExxonMobil, which it accused of defrauding investors by misleading them about the financial risks the company faced from climate change regulations.
While it lost that case, Ms de Wit said there would be more litigation coming from others and this time the claimants may be able to pinpoint exactly who is to blame, with the help of climate attribution science.
“Proving that link has been tricky to date,” she said.
Mills Oakley financial services partner Mark Bland said if McVeigh succeeds, it will set a new benchmark and could see the tide of funds managers dipping out of fossil fuel investments ramping up.
“This could have a shocking impact on ASX companies that have not managed climate change risks and/or have material exposures to the risks,” Mr Bland said.
“It could impact on company share prices and see shareholders exit from those investments.”
Regulators could increase pressure on companies to act
A judicial determination in McVeigh could also give regulators a stronger platform to enforce standards on industry.
Both Australia’s superannuation fund regulator, the Australian Prudential Regulation Authority (APRA), and the corporate watchdog, the Australian Securities and Investment Commission (ASIC), have repeatedly spoken out about the threats of climate change and the risks to companies.
APRA executive Geoff Summerhayes told ABC News this year there would be further scrutiny of how APRA-regulated entities manage climate change risks.
“It’s nearly three years since APRA first publicly stated that climate change presented financial risks that were foreseeable, material and actionable now, and that banks, insurers and superannuation funds needed to consider and respond to climate change as a financial risk,” Mr Summerhayes said.
“Since then, the weight of money has only tilted further in the direction of the low-carbon economy, as evidenced by Blackrock’s decision [on Monday].”
“The major economic transition underway presents substantial risks to businesses that are not adequately prepared but it also offers opportunities for forward-thinking economies and businesses.”
ASIC meanwhile has been conducting surveillance on how companies manage climate change risks, but as yet has not released those findings.
If governments don’t act, the private sector may have to
If McVeigh succeeds in the courts, the private sector may have to leap ahead of government action on climate change.
MinterEllison’s special counsel Sarah Barker, an expert in corporate law and climate change, said companies could no longer wait for the Federal Government to introduce a carbon tax.
“We need to look at the issue holistically, and not just the absence of a carbon tax, which is often pointed to as the determinative risk factor,” she said.
For Mr McVeigh, this case is not about getting compensated for any losses (and regardless of which side wins, both parties have privately agreed to cap costs against the other).
It is about ensuring super funds think about how they invest their members’ funds in the long-term.
“I really want to see a full comprehensive disclosure of information; something along the lines of the [G20] Taskforce on Climate Related Financial Disclosures (TCFD) recommendations,” he said.
“Super funds sustainably investing people’s money will make everyone better off,” Mr McVeigh said.
He said any changes beyond that “would be a bonus”.