Super performance test needs changing because the world is burning

Since then, the level of CO2 in the Earth’s atmosphere has roughly doubled to over 420ppm. Super has contributed to this outcome, albeit modestly because so far, high returns, or economic growth, have nearly always involved GHG emissions. It is the very dilemma that makes the goal of higher returns to the exclusion of all else seem like it’s from another era.

A UN report released late last month showed that in 2022, global GHG emissions set a record of 57.4 gigatons of CO2-equivalent, an increase of 1.2 per cent over 2021. Synthetic fluorocarbon gas emissions increased 5.5 per cent, followed by methane at 1.8 per cent, and nitrous oxide at 0.9 per cent.

A climate emergency

We are in a climate emergency and all available policy levers needed to be used, where available, to reverse this trend. Removing barriers potentially blocking prudentially supervised expert fiduciaries allocating capital to the energy transition is such a lever.

Change to the super performance test is needed because things change.

The super system is a rapidly changing and complex one that evolves with demographic, policy and social trends. Its sheer scale is also relevant; it has become an economic force of its own.

As recently as 2010, the system had only $1 trillion in assets and the biggest fund had only $47 billion. Why would we not seek to harness such a system in the decarbonisation race, while leaving it up to funds themselves to make the investment decisions? Any blockage in the way of this occurring, however small, must be cleared.

APRA should be tasked with administering and improving the test to meet changing circumstances.

Arguably, the test has already done its job as Mr Briggs explains. Many dud funds have been weeded out and consumers are better off. Not only is the problem of underperforming super funds largely fixed, but it also seems trifling in light of our current CO2 levels; levels that will take decades and longer to abate.

There are many other reasons why the performance test needs to be reviewed. It doesn’t deal adequately with the nearly $1 trillion that is in or approaching the retirement phase.

For those members, aiming for the highest returns is far from appropriate given the risks involved; risks that can harm members and for which super funds are not penalised under the performance test.

Given how often the test, introduced in 2021, has already needed to be reviewed suggests that parliament is not the most appropriate arm of government to be tasked with its policy stewardship.

The Australian Prudential Regulation Authority (APRA) should be tasked with administering and improving the test to meet changing circumstances. The government of the day can always have its say in its statements of expectations issued to APRA.

Another way of looking at this issue is to consider super’s unique time horizons. It is an ultra-long-term saving and spending system. Let’s take 23-year-old Emily who joined a super fund this year. The chances are that Emily, and the majority of female members of super funds born in 2000, will live beyond 2085.

Unless we really do cook the planet in the interim, many thousands of them will even live into the next century. Those dates are at the outer limits of, and even beyond, the current timelines climate scientists use.

Looked at through that prism, a directive to maximise returns over a mere decade, without considering other factors, seems to miss the point entirely.

Our super system can walk, and chew gum at the same time, and we must leave nothing in the way of the allocation of its capital to profitable investments in renewable energy and other climate-saving activities. Failure to do so would be a regrettable legacy to leave to the next generation.