How should superannuation CROs respond to evolving climate change expectations?

For Chief Risk Officers (CROs) in the superannuation sector who are already managing the local regulatory change agenda and addressing member expectations related to performance and sustainability, climate risk poses not only an additional complexity but also requires understanding new and different subject matter compared to traditional risks.

While there has been an increased focus on the maturity path for investment activities and disclosures related to those activities, the broader enterprise understanding and alignment on climate change, viewed as both a risk and an opportunity, has received less attention. In this ‘two-speed’ internal maturity path, it is vital that efforts and strategy are understood and aligned now and into the future.

So, what role does the second line of defence play in building and maintaining momentum in addressing climate risk across both investment and non-investment business activities?

Regulators, shareholders, customers and society increasingly expect super funds to proactively address climate risks and embrace mechanisms to enhance the transparency and comparability of climate-related data and information.

Local regulations require appropriate sophistication in risk management and ever more granular reporting on climate risk. APRA’s CPG229 Climate Change Financial Risk guidance and SPG 530 Investment Governance guide have already elevated climate and sustainability-related risks to the level of market risk, liquidity risk and concentration risk. ASIC is sharpening its focus on greenwashing. Meanwhile, Australia’s largest financial institutions will soon be required to adopt ISSB climate-related reporting standards, representing one of the biggest changes to risk reporting in decades.

For super funds with, or planning to set up, investments outside of Australia, the disclosure environment is even more complex. In the US for example, the SEC’s 13F reporting form applies to funds larger than US$100 million. Australian super funds falling into this category will be required to disclose asset level holdings, and emissions and give regard to how climate-related risks have impacted or are likely to impact their strategy, business model and outlook.

At the same time, in Europe, the concept of double materiality has been incorporated into the EU regulatory framework relating to sustainability reporting of financial institutions. The disclosure responsibilities of those captured by the incoming Corporate Sustainability Reporting Directive (CRSD) will need to report on how their sustainability impacts affect their bottom line as well as how their operations impact on sustainability factors.

As CROs grapple with this multitude of changes and requirements, we have identified three key observations that Australian super funds should take note of:

1. Take a whole-of-entity view

No matter which jurisdictional regulations are in play, super fund CROs must apply a sustainability risk lens across the whole organisation – not just in relation to investments. Without a clear strategic and integrated approach to sustainability, we’re seeing the emergence of a ‘two-speed’ approach to management of sustainability risks within super funds.

Responsible and sustainable investment approaches have developed quickly over the last few years and are becoming common place in most investment teams. While responsible investment practices mature across the industry, we expect elevated risks that need great second line support. The progress made to date in the first line suggests that this will become more of a collaboration between first and second line over time. 

Areas outside of investments in many funds have not yet developed a thorough understanding of sustainability and climate risk. With this capability still developing in the first line of defence in areas like procurement and real estate, the second line of defence needs to be more prescriptive or pre-emptive to ensure policies, frameworks and controls are appropriate.

With the emergence of the ‘two-speed’ approach to sustainability management, any inconsistencies in management between what happens at the fund versus management of the entity opens the broader organisation up to increasing scrutiny and risk. Development of risk management policies and governance frameworks therefore should consider a cohesive approach to integrating sustainability. Importantly, super funds expect the same of their investee companies. Super fund CROs need to model the behaviour they want to see throughout the superannuation value chain.

2. Aim for cohesion across geographies

CROs need to understand what managing different jurisdictional regulations means to risk teams, policies and processes. This doesn’t mean giving geographical teams licence to strike out on their own. Best practice is to take a consistent, principles-based approach. The most successful implementations adopt the most onerous regulation and treat this as a binding constraint. Setting up practices that capture the most granular level of detail required for reporting purposes and then working backwards. While this approach may appear to create
unnecessary work, it will pay dividends over time as other jurisdictions strengthen their disclosure obligations. Meanwhile, internal users will find immediate value in having more granular sustainability and climate risk data.

3. Make reporting decision-useful

To the above point, bear in mind that, while data is being captured and prepared for external reporting purposes, it’s also an essential input into risk management. There’s a real risk that, when reporting is purely built for external rather than internal purposes, its internal utility is diminished. CROs need to understand how risk teams and the broader business can use sustainability and climate risk data to support decision making and controls – and make sure that information is continually available.

There’s much work to be done, but there are huge opportunities for super funds in Australia to develop their sustainability practices.

These matters and other developments will be discussed at Baringa’s CRO Symposium events attended by the CROs of some of Australia’s largest super funds.

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