Climate change and the fiduciary duties of pension fund trustees – lessons from the Australian law

ABSTRACT

Leading financial market participants increasingly recognise that issues associated with climate change present significant – if not unparalleled – financial risks. Regulatory, technological and social responses present particular issues for investment strategy, asset valuation, risk assessment and disclosure by institutional investors. However, governance literature has historically characterised climate change as a non-financial issue, at least over mainstream investment horizons. Accordingly, there has been little academic analysis of whether trustee directors are compelled, rather than permitted, to have regard to climate change risks. This paper seeks to advance the literature by examining the obligations of pension (or ‘superannuation’) fund trustee directors in Australia. The analysis focuses on the obligation to apply due care, skill and diligence under section 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It concludes that a passive or inactive governance of climate change portfolio risks is unlikely to satisfy their duties: whether the inactivity emanates from climate change denial, honest ignorance or unreflective assumption, strategic paralysis due to impact uncertainty, or a default to a base set by regulators or investor peers. Considered decisions to prevail with ‘investment as usual’ may also fail to satisfy the duty if they are based on outdated methodologies and assumptions.

KEYWORDS:

• Climate change
• stranded assets
• corporate governance
• fiduciary duties
• directors’ duties
• trustees’ duties
• covenants
• best interests
• due care
• skill and diligence
• duty of prudence
• misleading disclosure

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Erratum

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributor

Sarah Barker (B.Com LLB (Hons) M.Env (Hons) MAICD) is a Special Counsel in the corporate group at international law firm Minter Ellison. She is a non-executive director of the Emergency Services & State Superannuation Fund, the Responsible Investment Association Australasia and NRCL Ltd, and teaches directors’ duties and responsibilities for the Australian Institute of Company Directors.

Notes

1. See, for example, discussion in Ford and Lee (2015) [9.510].

2. Including 28% metals and mining, 17% other materials and industrials and 25% financials: ASX, Listing on ASX – Gateway to the resource capital of Asia, Sydney, 2013. This includes many companies listed in the Forbes ‘Global 50’, including BHP Billiton, the Commonwealth Bank, Westpac and NAB. See also discussion in The Climate Institute (2015, 11).

3. See sections 172 and 174; Pensions Act 1995, sections 33(1), 35, 36(2); Trustee Act 2000, section 1.

4. See Delaware General Corporation Law and In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996); Uniform Prudent Investor Act §§2(b), (f), 7B U.L.A. 20 (2006); Employee Retirement Income Security Act 29 U.S.C. § 1104(a).

5. See the Canada Business Corporations Act R.S.C. 1985, c. C-44; provincial Trustee Acts – for example, Trustee Act R.S.O. 1900, c.T23, s27(1) (Can), amended by S.O. 1998, c.18, sched. B, s16(1); and provincial Pension Benefit Acts – for example, Pension Benefits Standards Act 2015, section 35(3)(b). It is noted that the legal system in Quebec province is based on the French civil law, although federal statutes based on common law precepts do apply in that province. See generally Waitzer and Sarro (2014), 1081–1116; Gold and Scotchmer (2015).

6. See Companies Act, Cap 50 section 157(1); Securities and Futures Act, Cap 289.

7. See Companies Act 1993.

8. See, for example, Hansell and Hazell (2004); Gregory, Grapsas, and Powell (2013); Sheehy and Feaver (2014) 347; Sheehy (2015). For a discussion of the points of difference between Australian duties laws and those in other common law jurisdictions, see Redmond (2012).

9. See, for example, Law Commission of England and Wales, Fiduciary Duties of Investment Intermediaries (2014) Law Com 350 (at 30, 34, 35, 37, 40, 42, 43, 44, 46, 105, 114, 171, 186, 187, 190,191 and 196) in which the Commission’s review and report on the fiduciary duties of investment intermediaries in the UK was informed by statutory and judicial authorities from the US, New Zealand, Australia and Canada; Hospital Products Ltd v United States Surgical Corporation & Ors (1984) 55 ALR 417 (at 431, 433, 436 and 466) in which the High Court of Australia cites authorities from the UK, the US, New Zealand and Canada in support of the content of fiduciary obligations (albeit not in a pension fund context) (including UK decisions Phipps v Boardman [1967] 2 AC 46 at 123 and NZ Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126 ; [1973] 2 All ER 1222 and Tate v Williamson (1866) 2 Ch App 55 at 61, United States decision Flexitized, Inc v National Flexitized Corporation (1964) 335 F (2d) 774, New Zealand decision Coleman v Myers [1977] 2 NZLR 225 and Canadian decisions Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371), McLeod and More v Sweezey [1944] 2 DLR 145 and Jirna Ltd v Mister Donut of Canada Ltd (1971) 22 DLR (3d) 639; affirmed (1973) 40 DLR (3d) 303; Nestle v National Westminster Bank PLC [1993] 1 WLR 1260, at 1268–69, in which the UK Court of Appeal cited the Canadian case of Guerin v The Queen (1984) 13 D.L.R. (4th) 321 as authority in relation to trustee obligations to follow a proper investment policy; and the seminal UK case of Cowan v Scargill [1985] Ch 270, 286–287, in which Megarry VC drew from two US cases in considering the duties of public pension fund trustees: Blankenship v Boyle 329 F Supp 1089 (1971) and Withers v Teachers’ Retirement System of the City of New York 447 F Supp 1248 (1978). It is also notable that when section 52 (applicable to the trustee itself) was introduced, the Treasurer expressed an intention to follow the standard of the ‘prudent expert’ set by the United States under the Employment Retirement Income Security Act – see Strengthening Super Security: New Prudential Arrangements for Superannuation (AGPS, Canberra, October 1991), 10.

10. For a general overview of the role of boards in the governance of institutional investors, see a recent speech by Andrew Bailey, Chief Executive Officer of the Bank of England Prudential Regulation Authority: Andrew Bailey, Governance and the Role of Boards, transcript of speech given to the Westminster Business Forum, London, 3 November 2015. See also, for example, Amado and Adams (2012); Bainbridge 2012, 43.

11. See, for example, Wolters Kluwer CCH, Australian Master Superannuation Guide, (at 31 March 2015) ¶3–100; Wolters Kluwer CCH, Australian Superannuation Commentary (at 23 November 2015) ¶2–810.

12. See, for example, under Australian law Murphy JA (with whom McLure P and Buss JA agreed on this point) in Streeter v Western Areas Exploration Pty Ltd [No.2] (2011) 29 ACLC ¶11–012, at 364–365: ‘The critical feature of a fiduciary relationship is that the fiduciary undertakes or agrees to act for or in the interest of another person. The fiduciary acts in a representative character’, applying Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 96–97; Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 196–197 [71]; John Alexander Tennis Club v White City Tennis Club (2010) 241 CLR 1, [87] (French CJ, Gummow, Hayne, Heydon, and Kiefel JJ). Under United States law, see REST 3d TRUSTS § 2, comment b: ‘[A] person in a fiduciary relationship to another is under a duty to act for the benefit of the other as to matters within the scope of the relationship.’

13. See, for example, Morwood 2001, 56; Edelman 2014.

14. Australian Securities Commission v AS Nominees [1995] 133 ALR 1, 13–14; Bartlett v Barclays Bank Trust Co Ltd (No’s 1 and 2) [1980] Ch 515, per Brightman LJ at 534; Finch v Telstra Super Pty Ltd (2010) 271 ALR 236 at 254. See generally Noel Davis and Michael Chaaya, LexisNexis Butterworths, The Law of Superannuation in Australia, vol 1 (at Service 28) [13–120]; Tennent (2009); REST 3d TRUSTS § 2, comment b, see §§ 70–84, and Restatement Second, Trusts §§ 169–185.

15. See, for example, Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments (2006) 198 FLR 302 at 324. See generally discussion in Richardson 2012, Chapter 5.

16. See also discussion of the direct liability of trustee directors to beneficiaries prior to the enactment of section 52A in Hanrahan (2008).

17. See, for example, discussion in Clark and Viehs (2014); Donald, Ormiston, Charlton 2014; Drummond (2010); Langbein and Posner (1980); Leigh (1997); Nicholls of Birkenhead (Lord) (1996); Richardson (2007); Richardson 2012, 69; Solomon 2009; Margaret Stone (Justice) (2007); Thomas (2008); Thornton (2008).

18. Notable exceptions include Clark and Viehs (2014); and Richardson 2007, 2012, 162–163 and 69.

19. See, for example, United Nations, Intergovernmental Panel on Climate Change (IPCC), AR5, Climate Change 2013: The Physical Science Basis – Headline Statements from the Summary for Policymakers, Working Group I Contribution to the IPCC Fifth Assessment Report (IPCC, 27 September 2013); International Energy Agency, International Energy Agency (2015) http://www.iea.org/; World Meteorological Organisation (2013); NASA, Natural Aeronautics and Space Administration, https://www.nasa.gov/

20. The physical impacts of climate change include both ‘catastrophic events’ such as the increased variability and extremity in weather patterns (including in the frequency, distribution and duration of extreme weather events) and ‘gradual onset’ impacts such as the increase in global average temperatures, rising sea levels due to water expansion and ice melt, and alteration of regional precipitation patterns. These impacts, in turn, can cause inundation of coastal and estuarine areas, regional droughts, ocean acidification, shifts in productive and habitable lands, and extinction of species of flora and fauna – see, for example, the scientific authorities set out in n19 above.

21. International Carbon Action Partnership, Emissions Trading at a Glance (2015) https://icapcarbonaction.com/en/?option=com_attach&task=download&id=289. China has announced plans for nation-wide emissions trading from 2017 (UNFCCC, Moving towards national wide domestic emissions trading scheme in China, (2015) https://cdm.unfccc.int/filestorage/e/x/t/extfile-20151005182716706-P7_2_ETS_in_China_SinoCarbon_Tang_Jin.pdf/P7_2_ETS%20in%20China_SinoCarbon_Tang%20Jin.pdf?t=bFd8bzBxMWp0fDByDZ6G8qAcBBFTzpFnb4na)

22. ‘COP21’ refers to the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change.

23. Paris Agreement (FCCC/CP/2015/L.9/Rev.1).

24. Id., Article 2(1)(a).

25. Id., Article 4(3) and (9).

26. Id., Article 4(1).

27. IPCC, Climate Change 2014 Synthesis Report, Summary for Policy Makers, 10.

28. Framework Convention on Climate Change, Conference of the Parties, Paris, 12 December 2015 http://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf.

29. Association for Sustainable and Responsible Investment in Asia (ASRIA) and Chubb Insurance Group (Chubb), Climate Governance in Asia: Considerations for Corporate Directors and Officers, 2015, 20–29, 32–33; Boston Common Asset Management, (2015); Carbon Tracker and the Grantham Research Institute, (2013); Rick Stathers and Alexia Zavos, (2015), 4.

30. See, for example, Sullivan et al. 2015; United Nations, ‘PRI Climate Change Strategy Project’ (Discussion Paper: Reducing Emissions Across the Portfolio, United Nations, July 2015).

31. See, for example, International Monetary Fund, Climate, Environment, and the IMF, Factsheet, 16 September 2015.

32. See, for example, World Bank, Economics of Adaptation to Climate Change: Synthesis Report, (2010) https://openknowledge.worldbank.org/handle/10986/12750.

33. See, for example, World Economic Forum, The Global Risks Report 2015 http://reports.weforum.org/global-risks-2015/, in which six out of the top ten ‘Global Risks in Terms of Likelihood and Impact’ were associated with climate change – including a failure of climate change adaption, water crises, biodiversity loss and ecosystem collapse, extreme weather events, natural catastrophes and energy price shocks.

34. See, for example, OECD 2015.

35. See World Federation of Exchanges, World Federation of Exchanges Visions, World Federation of Exchanges http://www.world-exchanges.org/home/index.php/about/about-wfe-vision.

36. Principles of Responsible Investment, About the PRI Initiative, http://www.unpri.org/about-pri/about-pri/; Friede, Busch and Bassen (2015), 210.

37. CDP works with 822 institutional investors holding USD95 trillion in assets to help reveal the risk in their investment portfolios – see https://www.cdp.net/en-US/Pages/About-Us.aspx.

38. The Investor Network on Climate Risk represents 110 institutional investors with more than USD13 trillion in assets under management – see http://www.ceres.org/investor-network/incr.

39. The Investor Group on Climate Change Australia/New Zealand, which represents 60 institutional investors with more than USD1 trillion in assets under management – see http://www.igcc.org.au/about.

40. The Institutional Investors Group on Climate Change represents 120 institutional Investors with more than €13 trillion under management – see http://www.iigcc.org/.

41. See, for example, AXA, AXA and Climate Risks (July 2015) https://cdn.axa.com/www-axa-com%2F1b503ed0-104e-4fe1-9b4f-cf6ea62844ae_axa_and_climaterisks_2014.pdf.

42. See, for example, Norges Bank, Financial Risks Associated with Climate Change (February 2015) http://www.nbim.no/en/transparency/submissions-to-ministry/2015/financial-risk-as-a-consequence-of-climate-change/.

43. See, for example, Standard & Poors, How Environmental and Climate Risks Factor Into Global Corporate Ratings (October 2015) https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1467885&SctArtId=348528&from=CM&nsl_code=LIME&sourceObjectId=9373730&sourceRevId=1&fee_ind=N&exp_date=20251020-17:15:34.

44. See, for example, Black Rock Investment Institute, The Price of Climate Change: Global Warming’s Impact on Portfolios (October 2015) https://www.blackrock.com/corporate/en-mx/literature/whitepaper/bii-pricing-climate-risk-international.pdf.

45. See, for example, Mercer, Investing in a Time of Climate Change (June 2015) http://www.mercer.com.au/services/investments/sustainable-growth/climate-change-report-2015.html.

46. See, for example, Stathers and Zavos (2015).

47. Boston Common Asset Management 2015.

48. See, for example, Willis Towers Watson Thinking Ahead Group, We Need a Bigger Boat: Sustainability in Investment (1 August 2012) https://thinkingaheadinstitute.org/Document/List?categoryId=231&categoryName=Major publications.

49. See, for example, Citigroup, Global Darwinism II: Why a Low Carbon Future Doesn’t have to Cost the Earth (August 2015) https://ir.citi.com/hsq32Jl1m4aIzicMqH8sBkPnbsqfnwy4Jgb1J2kIPYWIw5eM8yD3FY9VbGpK%2Baax.

50. See, for example, Caldecott, Dericks, and Mitchell (2015); Clark, Feiner, and Viehs (2014).

51. See, for example, Hart 2015.

52. The debate regarding whether duties of due care and diligence owed by Australian directors are ‘fiduciary’ in nature is acknowledged, although not pursued in this paper. That debate centres on whether the duties are prescriptive (i.e. requiring positive action) or confined to the proscriptive (requiring restraint). This debate was prompted by the decision of the High Court of Australia in Breen v Williams (1996) 186 CLR 1 that a duty can only be ‘fiduciary’ in nature if it is proscriptive, not prescriptive. See, for example, discussion by Austin J in Australian Securities and Investments Commission (ASIC) v Rich (at 7190), and in the Bell Group cases in their consideration of the Australian common law duty to act in good faith in the best interests of the company. For a general discussion of the issue see, for example, Collins (2014); Langford (2013). For a discussion of this issue under US and Canadian law, see Waitzer and Sarro (2014), 1090. For the purposes of this paper, the duty (and the statutory covenants under the SIS Act) in relation due care and diligence are referred to as ‘fiduciary’ duties.

53. See, for example, Gerrard and Freeman (2014); McDonald (2011); Lord et al. 2012; Fisher (2013); Faure and Peeters (2011); Shearing 2010; Peel and Osofsky (2015); Vanhala and Hilson (2013); Zahar, Peel, and Godden (2012).

54. Peel and Osofsky 2015.

55. See, for example, California v General Motors Corporation et al, Case No. C06-05755 MJJ, Order granting Defendants’ Motion to Dismiss (N.D. Cal. 2007), p.2 and Native Village of Kivalina v ExxonMobil Corp., et al, 2009 WL 3326113 (N.D. Cal.) (Kavilina) – cf. the appeal in Comer et al v Murphy Oil USA Inc et al, Third Amended Complaint, Case No., 1:05-CV-436 LTD-RHW, (2006 WL 1066645 (S.D. Miss. 2006)) (Comer) and Connecticut, et al. v American Electric Power Company Inc., et al, 2009 WL 2996729 (C.A.2 (N.Y.)) and, more recently, Washington Environmental Council; Sierra Club, Washington State Chapter v Bellon (9th Circuit, 17 October 2013). See generally discussion in Colares and Ristovski (2014). Claims for breach of the public trust doctrine have also recently been successful against Washington State in the United States (Zoe & Stella Foster v. Washington Department of Ecology, 14-2-25295-1 (Ct App, 2015) and the Federal government in Juliana et al v.the United States of America et al, 6:15-cv-1517-TC, Order, Findings & Recommendation, (D.C. Oregon, 8 April 2016). See discussion in Tuhus-Dubrow (2015); Castillo (2015).

56. In Europe, public interest litigants have pursued national governments for alleged negligence in climate change policy setting. In one high-profile example, in June 2015 The Hague District Court found in favour of Dutch non-government organisation Urgenda in its claim that the Dutch Government had negligently failed to implement emissions controls consistent with the Netherlands’ proportionate contribution to emissions reductions aimed at limiting global warming to <2°C above pre-industrial levels (see The Hague District Court, Urgenda v Netherlands, Case number C/09/456689/HA ZA 13-1396. For an English translation of the judgment on 24 June 2015, see http://www.urgenda.nl/documents/VerdictDistrictCourt-UrgendavStaat-24.06.2015.pdf). The Government is appealing the decision. Similar claims, based either in negligence or the public trust doctrine, were also on foot at the time of writing in Norway, Belgium and New Zealand.

57. For a general discussion of potential causes of action against government entities, see Klein 2015.

58. See, for example, the obiter comments of the District Court on the merits of the plaintiff’s claim in Comer (2006 WL 1066645 (S.D. Miss. 2006)) and those of the Court in Kivalina (2009 WL 3326113 (N.D. Cal.)), 8:

[T]he harm from global warming involves a series of events disconnected from the discharge itself. In a global warming scenario, emitted greenhouse gases combine with other gases in the atmosphere which in turn results in the planet retaining heat, which in turn causes the ice caps to melt and the oceans to rise, which in turn causes the Arctic sea ice to melt, which in turn allegedly renders Kivalina vulnerable to erosion and deterioration resulting from winter storms.

59. Illinois Farmers Insurance Co. et al. v. Metropolitan Water Reclamation District of Greater Chicago et al., case number 1:14-cv-03251; Illinois Farmers Insurance Co. et al. v County of McHenry, case number 1:14-cv-03282; Illinois Farmers Insurance Co. et al. v. County of Dekalb et al, case number 2014L31; Illinois Farmers Insurance Co. et al. v. Country of DuPage el al., case number 2014L000385; Illinois Farmers Insurance Co. et al. v County of Kane et al., case number 2014L153; Illinois Farmers Insurance Co. et al. v. County of Kendall et al., case number 2014L034; Illinois Farmers Insurance Co. et al v. County of Lake, case number 14L281; Illinois Farmers Insurance Co. et al. v. County of LaSalle, case number 2014L63; Illinois Farmers Insurance Co. et al. v. County of Will, case number 14L00314.

60. See Roe v Arch Coal Inc et al, Case: 4:15-cv-00910-NAB, United States District Court, Eastern District of Missouri, 9 June 2015 (consolidated class action complaint filed 11 December 2015, proceedings stayed on 15 January 2016 following Arch Coal’s filing for Chapter 11 bankruptcy protection) and Lynn v Peabody Energy Corporation et al, Case: 4:15-cv-00916-AGF, United States District Court, Eastern District of Missouri, 11 June 2015 (second amended complaint filed 11 March 2016). Although Peabody also filed for Chapter 11 protection in April 2016, as at 29 April 2016 the defendants’ Notice seeking a stay of the proceedings has been contested by the plaintiffs on the basis that the claim against individually-named defendants should not be impacted.

61. Article 23-A, Section 352 et seq. of the New York General Business Law (the ‘Martin Act’) and Section 63(12) of the New York Executive Law.

62. Attorney General of the State of New York Environmental and Investor Protection Bureaus, In the Matter of Investigation by Eric T Schneiderman, Attorney General of the State of New York of Peabody Energy Corporation, Respondent, Assurance 15–242.

63. It is noted that the Full Federal Court of Australia recently found that a market-based approach to causation (i.e. generally, that does not require a plaintiff to demonstrate specific reliance on a misleading statement or conduct by the defendant where loss manifests due to a decline in market price) is reasonably arguable under Australian law – see Caason Investments Pty Ltd v Cao [2015] FCAFC 94.

64. For early explorations on point, see, for example, Baker & McKenzie, (2012, 16); Barker 2013; Barker and Girgis (2015); Gold and Scotchmer (2015); Pam McAllister, ‘Climate Change Risk’, Mercer Legal Consulting, November 2015, http://proxywatch.com/wp-content/uploads/2015/11/151117_INV19481_Super-trustee-liability_Pams-Article_4-pager-2.pdf; Nina Hart, ‘Legal Tools for Climate Adaptation Advocacy: Securities Law’(Paper, Sabin Center for Climate Change Law, Columbia Law School, University of Columbia, May 2015); Sullivan et al. 2015; Waitzer and Sarro (2014).

65. Donald and Taylor (2008); Donald, Ormiston and Charlton (2014); Drummond (2010); Langbein and Posner 1980; Leigh 1997; Nicholls 1996; Shearing 2010; Stone 2007; Thomas 2008.

66. Richardson (2007, 2012, 162–163) acknowledges that a failure to have regard to climate change may be in breach of duty, but does not interrogate the issue further:

fiduciary investors who utterly ignore environmental and social considerations arguably may also contravene their fiduciary obligations. Some ecological and human rights issues are becoming so pervasive and serious that few investors can continue to be indifferent to their impact. Climate change is an example.

67. See, for example, Butler (2008); Collins 2014; Donald 2009; Donald, Ormiston and Charlton 2014; Langbein and Posner 1980; Leigh 1997; Thornton 2008. See also commentary referred to in n64 above.

68. Section 52A(6) provides that the covenants in section 52A ‘operate as if the director were a party to the governing rules’.

69. As these covenants are implied into the trusts’ governing rules under section 52A(2) of the SIS Act, they are effectively duties owed directly to beneficiaries as well as the corporate trustee. However, the analysis in this paper presumes that the interests of the corporate trustee and its beneficiaries are materially aligned. This is not to suggest that the strategic objective of a particular member may not be to maximise short-term returns (e.g. given impending retirement), or even of the fund itself in particular circumstances (e.g. of a defined benefit fund to meet current pension payment requirements). However, this paper focuses on the objective of a solvent fund in the ordinary course of its business. See, for example, Gold and Scotchmer (2015), 11–12.

70. An exception to this general proposition applies in relation to the trustee’s covenants regarding the avoidance, disclosure and management of conflicts under sections 52(2)(d) and 52A(2)(d) which, under sections 52(4) and 52A(3), prevail over any obligations to the contrary under Part 2D.1 of the Corporations Act. See generally discussion in Davis and Chaaya, ¶13,102, ¶81,060-81-080, Chapter 48.

71. ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342, 525; ASC v AS Nominees (1995) 62 FCR 504, 517. See also general discussion in Australian Superannuation Commentary, ¶2–810, ¶2–835.

72. See, for example, Donald and Taylor (2008); Tennent 2009.

73. This is consistent with the ‘sole purpose test’ for registrable superannuation entities under section 62(1) of the SIS Act, which provides that the ‘core purpose’ for which the fund is maintained must be for the provision of benefits for (or in respect of) each member upon their retirement, attainment of a specified age or death. See also Scott v Federal Commissioner of Taxation (No 2) (1966) 10 AITR 290; 14 ATD 333, which considered the forerunner to section 62 of the SIS Act, section 23(j) of the Occupational Superannuation Act. Windyer J held (at 278): ‘ … a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits … upon their reaching of a prescribed age’ (emphasis added). Whilst Donald, Ormiston and Charlton 2014 (at 543–544) suggest that in its interpretation of the sole purpose test in section 62 in Superannuation Circular No.III.A.4: The Sole Purpose Test (February 2001), the Australian Prudential Regulation Authority ‘envisages a less exacting test of “sole purpose” than a literal reading of the section would impose … [with] a more accommodating attitude to the presence of “incidental advantages” in the exercise of a trustee’s power’, an examination of the wording of that circular (at [34]) reveals that it does not disturb the primacy of the financial objective in driving trustees’ exercise of power: ‘the provision of retirement benefits for members is the overriding consideration behind the investment decision’. The consistency of incidental environmental and social benefits with the pursuit of financial benefits is discussed further in relation to Cowan v Scargill, below.

74. See, for example, Nicholls 1996, at 211: ‘the money in the fund represents part of the overall pay package of the members, in the form of deferred remuneration’; Sutherland v Woods [2011] NSWSC 13 at [115].

75. Collins 2014, 632.

76. Cowan v Scargill, 286–287.

77. See, for example, discussion of Cowan v Scargill in Harries v The Church Commissioners for England [1992] 1 WLR 1241. For discussion of its frequent mis-interpretation, and application in a modern investment context, see, for example, Law Commission of England and Wales and Gold and Scotchmer (2015), 14–18.

78. See, for example, Gold and Scotchmer (2015), 11–12. This is not to suggest that the strategic objective of a particular member may not be to maximise short-term returns (e.g. given impending retirement), or even of the fund itself in particular circumstances (e.g. of a defined benefit fund to meet current pension payment requirements).

79. See, for example, Thornton 2008, 411.

80. See also discussion in Leigh 1997, 348.

81. Section 52A(2)(b), emphasis added. Section 52A(2)(f) also requires fund trustee directors to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out its (similar) covenants set out in section 52. The general fiduciary obligations of the trustee and its directors continue to apply in addition to the covenants prescribed under the SIS Act – as do the directors’ duties prescribed under Part 2D of the Corporations Act (except in relation to the trustee’s covenants regarding the avoidance, disclosure and management of conflicts under sections 52(2)(d) and 52A(2)(d) of the SIS Act which, under sections 52(4) and 52A(3), prevail over any obligations to the contrary under Part 2D.1 of the Corporations Act.)

82. See generally Davis and Chaaya, ¶81,060; Donald 2009, n16 at 56; Re VCA and APRA (2008) 105 ALD 236; [2008] AATA 580, 347, 50, [347].

83. SIS Act, section 29VO(3).

84. Section 34C of the SIS Act empowers APRA to promulgate binding prudential standards. It also issues (non-binding) statements of expectation in the form of prudential practice guides. APRA’s Prudential Practice Guide on Investment Governance (SPG 530), issued in 2013, states that a trustee may adopt an ‘ethical investment option’ with an ESG focus, subject to appropriate supporting analysis that demonstrates that the same will not expose beneficiaries’ interests to undue risk. ESG factors are referred to in SPG530 as ‘non-financial’.

85. Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012, Explanatory Memorandum, paragraph 1.42: ‘[The reform] also heightens existing requirements in relation to the degree of care, skill and diligence required of trustees. The overall effect of these changes [introducing the covenants in section 52] … will be to hold trustees to a higher standard.’ See also ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [542] re the higher standard of care owed by trustee directors (as against directors of ‘ordinary’ corporations). Trustee Act 1958 (Vic), section 6(1); Trustee Act 1925 (NSW), section 14A(2); Trustee Act 1973 (Qld), section 22(1); Trustee Act 1936 (SA), section 7(1); Trustee Act 1898 (Tas), section 7(1); Trustee Act 1925 (ACT), section 14A(2); Trustee Act 2007 (NT), section 6(1). The only decided case that has considered the content of these duties is Gardner & Anor v Mattila [2015] NTCA 1, in which the Court of Appeal of the Supreme Court of the Northern Territory considered the content of the duty in the second limb of the test of due care and diligence under section 6(1)(b), viz¸ the duty owed by non-professional trustees to exercise ‘the care, diligence and skill that a prudent person of business would exercise in managing the affairs of other people’. Even in respect of this lower standard of care (one arguably akin to the ‘ordinary prudent person’ standard that applied under the SIS Act until 2013), their Honours held that the appellant had breached his fiduciary duty of care:

[35] Unfortunately for those with little education and skill who take on the duties of a trustee, the standard is an objective one, independent of the skill and prudence the trustee in question personally possesses … [36] … Mr Gardner discharged none of these duties. … no consideration was given by Mr Gardner to the best use of Mr Mattila’s money, no alternative use or investment was considered, no business plan was prepared, no legal or financial advice was sought on Mr Mattila’s behalf, and the risk of overcapitalization (which eventuated) was not considered.

Prior to 2013, the trustee directors’ SIS Act duties did not materially add to those applicable under the general law – see, for example, Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2011] NSWCA 204. See also discussion in Collins 2014; at 645–46 and Donald 2009, at 51.

86. See the mirror provisions to section 180(1) in sections 601FC(1)(b) and FD(1)(b) of the Corporations Act; ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [643]: [536] I consider that the standard of care applicable where a corporation is a professional trustee, holding itself out to the public and being paid as such, will often be more exacting. The requirement that a professional trustee exercise a higher standard of care and take a cautious approach was discussed by Finn J in ASC v AS Nominees at 516–517 where his Honour usefully set out and considered the relevant authorities: see Speight v Gaunt (1883) 9 App Cas 1; King v Talbot (1869) 40 NY 76; Re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347 at 355 per Lindley LJ; Scott, The Law of Trusts (4th ed, Little Brown & Company, 1988) at 432 … .[643] The Explanatory Memorandum (at para 8.8) indicates that these duties are intended to reflect the fundamental duties of a fiduciary and the special nature of the relationship between an RE and the members of a scheme. The duties exist largely for the protection of the members.

87. ASIC v Rich (2003) 44 ACSR 341, [35]; ASIC v Rich (2009) 75 ACSR 1, [7201], citing Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 15, 123; ASIC v Vines (2005) 55 ACSR 617, [1067]; Daniels v Anderson (1995) 37 NSWLR 438, 505.

88. ASIC v Healey & Ors [2011] FCA 717 (hereafter Centro), [16], [143] and [162]. See also ASIC v Rich (2009) 75 ACSR 1, [7205-6].

89. Wyong Shire Council v Shirt (1980) 146 CLR 40, 47, applied in ASIC v Rich (2009) 75 ACSR 1, [7231, 7236] and ASIC v Vines (approved by the Court of Appeal in Vines v ASIC (2007) 25 ACLC 448); ASIC v Ingleby (2012) 91 ASCR 66, 69.

90. See ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [532].

91. See, for example, authorities above n84 and 85.

92. The difference in the language used to express the duty of competence under the Corporations Act (‘due care and diligence’) and the SIS Act (‘due care, skill and diligence’) is noted. However, the addition of the word ‘skill’ has not been regarded as material ‘other than as attempt to add emphasis to the application of effort or utilising the skill necessary to discharge the requirement of due care and diligence’ – Collins 2014; at 644. See also Butler 2008, at 227.

93. See generally Centro [2011] FCA 717, [16], [143] and [162]. See also ASIC v Rich (2009) 75 ACSR 1, [7205-6].

94. See Finch v Telstra above n20, at 254; ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [571]; applied in Sharp v Maritime Super Pty Ltd [2013] NSWSC 389 at [33].

95. Centro [2011] FCA 717, [16], [143] and [162]. See also ASIC v Rich (2009) 75 ACSR 1, [7203].

96. Alcoa of Australia Retirement Plan Pty Ltd v Frost [2012] VSCA 238, Nettle JA at [47–48], in relation to the determination of a fund member’s entitlement to TPD benefits. Section 56(3) of the SIS Act specifically contemplates that trustee directors should seek advice, and be indemnified out of the assets of the trust in doing so In the words of Deputy President Forgie in Re VBN and APRA:

As essential as professional advice is, the trustees’ obligation goes beyond merely seeking, accepting and following professional advice … the trustee [must] use their own acumen, knowledge and judgment in weighing all the relevant factors, including professional advice – ‘VBN and Ors and Australian Prudential Regulation Authority and Anor [2006] AATA 710; (2006) 92 ALD 259 (25 July 2006), 469.

97. Finch v Telstra, at 254.

98. Nestle v Westminster Bank, 1270.

99. See, for example, Tuftevski v Total Risks Management Pty Ltd [2009] NSWSC 1021, where a question arose as to what was required by way of enquiry on the part of a trustee in the context where the trustee had received material adverse to the employee’s claim. Smart AJ held [at 16]:

In my opinion bona fide enquiry and genuine decision making where these are required constitute an integral part of performing a fiduciary obligation. … The process followed by the Trustee … must involve deciding a question of fact in good faith and giving it real and genuine consideration. This often cannot be done without conducting some investigation and making relevant inquiries … .

See also ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [571]; Finch v Telstra, 254; Sharp v Maritime Super Pty Ltd [2013] NSWSC 389 at [33], [39].

100. Centro [2011] FCA 717.

101. See ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [567]–[574] (cf Gilberg v Stevedoring Employees Retirement Fund Pty Ltd [2008] NSWSC 1318 where trustees did not have legal discretion (power) under the trust deed to reconsider a decision in relation to total and permanent disablement benefits); Nestle v National Westminster Bank, where the Court of Appeal held that a trustee bank had a duty to review investments of a beneficiary regularly, and that a changing investment environment during the life of the trust should have prompted consideration of a variation in the content of the portfolio. The position under Australian and UK law is consistent with that in the United States, wherein the Supreme Court recently held in Tibble et al v. Edison International et al S. Ct., No. 13-550, 2015 WL 2340845 (May 18, 2015) that the duty of due care and diligence (prudence) under §1104 of ERISA requires on-going monitoring and, where appropriate, reconsideration, of previous decisions. See generally discussion in Thornton 2008.

102. Apostolovski v Total Risk Management Pty Ltd (2010) 79 NSWLR 432.

103. See, for example, discussion in Collins 2014; 634 and Thornton 2008; 410.

104. See Nicholls 1996, at 210.

105. See, for example, Nestle v Westminster, at 1275, 1284.

106. ASIC v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3)) [2013] FCA 1342 at [571]; applied in Sharp v Maritime Super Pty Ltd [2013] NSWSC 389 at [33].

107. Alcoa of Australia Retirement Plan Pty Ltd v Frost [2012] VSCA 238, Nettle JA at [60].

108. Waitzer and Sarro (2014), 1090–1091.

109. Whilst there is a significant body of literature examining the motivations for positive, voluntary corporate adaptation to climate change, the reasons for governance inaction remain under-researched in the recent literature – see, for example, Peer C Fiss and Edward J Zajac, ‘The Symbolic Management of Strategic Change: Sensegiving via Framing and Decoupling’ 49 Academy of Management Journal, 1173; Solomon 2009 and United Nations Environment Program Finance Initiative (UNEPFI), Climate risk to the Global Economy, CEO Briefing on Climate Change, 2002, 1 http://www.unepfi.org/fileadmin/documents/CEO_briefing_climate_change_2002_en.pdf. These categories of governance inaction on climate change were originally synthesised by lead author Sarah Barker 2013.

110. See, for example, Greg Liddell, Fiduciary duty and climate change (24 May 2015) Investment Operations & Custody http://ioandc.com/fiduciary-duty-and-climate-change/; Loechel, Hodgkinson, and Moffat (2013); Solomon 2009, 19.

111. See, for example, Loechel, Hodgkinson, and Moffat (2013), 473; Rouse, (2 July 2013); Solomon 2009, 13.

112. See, for example, Claudia Delpero, Is your pension fund safe from climate change? Fiduciary duty is the key (30 October 2015) Road to Paris: Science for Smart Policy http://roadtoparis.info/2015/10/30/is-your-pension-fund-safe-from-climate-change-fiduciary-duty-is-the-key/; Fischman and Rountree 2012; Loechel, Hodgkinson, and Moffat (2013); Trexler and Kosloff 2012.

113. Solomon 2009, 21; Trexler and Kosloff (2012).

114. Amado and Adams (2012), 12; Solomon 2009, 13; Trexler and Kosloff (2012); UNEPFI.

115. H v Royal Alexandra Hospital for Children (1990) Aust Torts Reports ¶81-000, SC (NSW). In a climate change context, see also Gold and Scotchmer (2015), 23:

Given the overwhelming scientific consensus about the causes and implications of global climate change, climate change denial is not an option for pension fiduciaries. Per Scargill, it is not permissible for a fiduciary to bring personal or ideological views to bear on fiduciary decision-making; rather the duty of prudence requires a thorough, [on-]going and rational evaluation of relevant information to support fiduciary decision-making.

116. Cowan v Scargill; 286–287.

117. Solomon 2009, 22:

Despite a general interest in climate change issues among the trustees, and a general understanding of what would result from climate change, they seemed to display little understanding of a direct link between climate change and financial return. Many commented that the ‘connection’ between climate change and financial return was unclear. When asked whether they thought climate change was an important factor affecting financial return and shareholder value, most of the interviewees claimed that it had very little, if any impact.

See also UNEPFI.

118. Centro [2011] FCA 717.

119. ASIC v Lindberg (2012) 91 ACSR 640, [30]. See also ASIC v Ingleby (2012) 91 ACSR 66; AWA v Daniels (1992) 7 ACSR 759; Centro [2011] FCA 717, [189].

120. Centro [2011] FCA 717, [189]; Alcoa of Australia Retirement Plan Pty Ltd v Frost [2012] VSCA 238, Nettle JA at [47–48].

121. ASIC v Ingleby (2012) 91 ACSR 66 (appeal to the CAVSC upheld in relation to quantum of penalty, but not liability); ASIC v Lindberg (2012) 91 ACSR 640; Shafron v ASIC (2012) 286 ALR 612.

122. See authorities in n 101 above.

123. ASIC v Ingleby (2012) 91 ACSR 66 (appeal to the CAVSC upheld in relation to quantum of penalty, but not liability); ASIC v Lindberg (2012) 91 ACSR 640; Shafron v ASIC (2012) 286 ALR 612.

124. ASIC v Ingleby (2012) 91 ACSR 66; ASIC v Lindberg (2012) 91 ACSR 640; Centro [2011] FCA 717; Alcoa of Australia Retirement Plan Pty Ltd v Frost [2012] VSCA 238, Nettle JA at [47–48].

125. See e.g. Fischman and Rountree 2012; Loechel, Hodgkinson, and Moffat 2013; Celeste K Young and Roger N Jones, Building Bridges: Supporting Adaptation in Industry, VCCAR Think Tank Policy Paper, Victorian Centre for Climate Change Adaptation Research, Melbourne, September 2013; 3.

126. Nicholls 1996 at 214–215.

127. See United Nations IPCC; International Energy Agency, World Energy Outlook 2015, November 2015, www.worldenergyoutlook.org. It is noted that prevailing scenarios may also now be updated to account for the 1.5°C target included in the COP21 Paris Agreement.

128. See, for example, Cornell (2015).

129. The Courts have previously held that non-executive directors can be in breach of their duty of care and diligence where misleading statements are made to the market, where the directors have failed to query the assumptions or methodologies on which the actuarial reports underlying the statements are based – see ASIC v Macdonald (No 11) [2009] NSWSC 287, 325. The findings on liability in this matter were confirmed on appeal to the High Court of Australia – see ASIC v Hellicar [2012] HCA 17.

130. See, for example, The Climate Institute 2015, 8.

131. See MSCI, Environment Agency Pension Fund Selects MSCI as Low Carbon Equity Index Provider, (2015) https://www.msci.com/documents/10199/b1235841-4cde-4645-8614-c799c57701d7 and ETF, Amundi launches Europe’s Second Low Carbon ETF, (2015) http://europe.etf.com/europe/sections/features-a-news/10823-amundi-launches-europes-second-low-carbon-etf.html.

132. See, for example, KPMG, Gearing up for green bonds, (2015) https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/sustainable-insight/Documents/gearing-up-for-green-bonds-v2.pdf and Allens, Green bonds: emergence of the Australian and Asian markets, (2015) https://www.allens.com.au/pubs/pdf/baf/report-baf23oct15.pdf.

133. Centro [2011] FCA 717, [182].

134. ASIC v Lindberg (2012) 91 ACSR 640; Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, 493, per Barwick CJ, McTiernan and Kitto JJ:

Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. See also Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 832, where the Privy Council held: ‘There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.’

135. See, for example, ASIC v Maxwell (2006) 59 ACSR 373, 397 [102]; ASIC v Lindberg (2012) 91 ACSR 640, 654 [72].

136. Explanatory Memorandum, Corporate Law Economic Reform Bill 1999, [6.1], [6.4].

137. ASIC v Mariner Corporation Limited [2015] FCA 589.

138. See, for example, discussion in Solomon 2009.

139. ASRIA and Chubb, 4.

140. For a discussion of functions inherent in the assessment of climate change risks, and the range of responses thereto, see, for example, ASRIA and Chubb; PRI, Developing an Asset Owner Climate Strategy, December 2015; Stathers and Zavos (2015); The Climate Institute (2015); UNEP FI and 2C Investing Initiative, Climate Strategies and Metrics: Exploring Options for Institutional Investors, UNEPFI http://2degrees-investing.org/IMG/pdf/climate_targets_final.pdf.

141. Section 52A(2)(f) of the SIS Act specifically requires trustee directors to exercise due care and diligence in ensuring that the corporate trustee carries out its own obligations – which in turn specifically include investment strategy and risk management. See also the preamble to APRA SPS 510 Governance pursuant to section 34C of the SIS Act states: ‘The ultimate responsibility for the sound and prudent management of [a superannuation fund’s] business operations rests with its Board of directors.’ Paragraph 10 states:

The Board, in fulfilling its functions, may delegate authority to management to act on behalf of the Board with respect to certain matters, as decided by the Board. This delegation of authority must be clearly set out and documented. The Board must have mechanisms in place for monitoring the exercise of delegated authority. The Board cannot abrogate its responsibility for functions delegated to management. (emphasis added)

142. See, for example, AODP, Climate Change Investment Initiative: Funds Survey Results, report for the AIST and the Climate Institute, March 2010, 11; UNPRI, Developing an Asset Owner Climate Strategy, December 2015, 5.

143. See, for example, ASIC v Adler (2002) 41 ACSR 72, in which a CEO contravened his duty to exercise due care and diligence (amongst other breaches) due to his failure to ensure that proper safeguards were implemented for the appraisal of investments against company policies (appeal largely dismissed: Adler v ASIC (2003) 46 ACSR 504).

144. See ASIC v Macdonald (No 11).

145. See, for example, ASIC v Maxwell (2006) 59 ACSR 373, 397 [102]; ASIC v Lindberg (2012) 91 ACSR 640, 654 [72]; Nestle v Westminster Bank, 1284. In a US context, see, for example, Fifth Third Bancorp v Dudenhoeffer, 134 S. Ct. 2459 (2014).

146. ASIC v Citrofresh International Ltd (No.2) (2010) 77 ACSR 69.

147. ASIC v Sydney Investment House Equities Pty Ltd & Ors (2008) 69 ACSR 1.

148. ASIC v Elm Financial Services Pty Ltd [2005] NSWSC 1033; ASIC v MacDonald (No. 11) (2009) 256 ALR 199.

149. As was alleged in the Fortescue series of cases against its managing director, Andrew ‘Twiggy’ Forrest, in which the High Court of Australia ultimately found that the company had not made a misleading disclosure to the market: see ASIC v Fortescue (2011) 274 ALR 731, Forrest v ASIC [2012] HCA 39.

150. See discussion in Section Two, above.