There's more to super fund HESTA's divestment than ethics

When industry superannuation fund HESTA announced it would sell its A$23 million stake in offshore immigration detention centres Transfield, it wasn’t the first to do so. UniSuper had rather more quietly decided to divest its holding months ago -– but both divestments came in the immediate wake of campaigns by unions and refugee advocacy groups that targeted the funds.

The HESTA divestment has been decried as shareholder activism by conservative critics, but is part of a long history at HESTA and other union-sponsored funds of divesting members’ retirement savings from ethically problematic corporations.

HESTA was the first of the big industry funds to divest from tobacco companies for precisely the same reason: companies with public reputations for being unethical typically produce lower sharemarket returns. Staff don’t want to work for ethically “dirty” companies, firms with poor reputations spend more on publicity and legal fees, and tend to find it more difficult to win business from “progressive” sectors of the economy.

Divestments of this type have been going on in the financial world since the 1970s when ethical investor groups in the United States ran campaigns against corporations that did business in Apartheid South Africa. Crucially, however, it is the justification for such shareholder activism that has changed.

The purpose of a super fund

When the industry super movement was established by the building unions in the 1980s, a fear campaign was started by employer groups concerning “pension fund socialism”. Would union-appointed trustees of superannuation funds walk into company boardrooms and try to tell senior management what to do? The fiduciary obligations of trustees had long been interpreted in a minimal, instrumental manner – would it change under the influence of the trade union movement?

The traditional common-law obligation on a trustee of a superannuation fund is called the “prudent man” rule – or since the introduction of the Superannuation Industry (Supervision) Act of 1993, the “sole purpose test”. The sole purpose of a superannuation fund is to maximise its members’ retirement savings, not to get involved in political campaigns.

But the generally accepted notion of a fiduciary duty has changed substantially since 1993. Recent surveys of fiduciary standards by the OECD and the UN’s Principles for Responsible Investment (PRI) have shown that the sole purpose test has generally been interpreted more conservatively by many financial industry professionals in Australia than is typical internationally.

The received financial industry attitude has generally been of the “I eat the cake, I don’t bake it” kind. But a new development, since the tech wreck of the early 2000s, has been for superannuation funds to take responsibility for what the investment industry calls environmental, social and governance (ESG) matters.

The new thinking is that trustees who don’t take ESG matters seriously are breaching their fiduciary responsibilities, not going beyond them.

If poorly designed remuneration structures for CEOs are put forward by boards of directors, then superannuation trustees are obliged to intervene. If having more women on corporate boards correlates with higher shareholder returns, then superannuation funds are breaching their fiduciary duty by not advocating for more women on boards. And if companies in which their members’ retirement savings are invested move into areas of reputational risk (such as immigration detention) then superannuation trustees would be breaching their legal obligations not to be concerned.

Bernard Mees is a staff-elected member of the Consultative Committee of UniSuper and currently holds a grant from the Australian Institute of Superannuation Trustees to write a history of superannuation in Australia.