Superannuation fund HESTA advocates for reform

Advocating for concrete action on issues of global, systemic importance is core to the best financial interests of superannuation fund HESTA, according to CEO Debby Blakey GAICD. 

With close to $70b in investment and more than one million members, when HESTA talks, people listen. “The responsibility we have as an organisation is enormous,” says Debby Blakey GAICD, the fund’s chief executive.

Blakey is using that voice to advocate for reforms to the super system to help improve the retirements of women and low-income earners, and to advocate for emissions reductions in the companies that it invests in.

“The most important thing for me as CEO, and for us as a leadership team, is that we never forget those members that we represent and that we stay close to them,” she says. “When you represent such a large group, you have a significant voice at the table — and we want to use that voice smartly, wisely, but also with humility. Because at the end of the day, it is always about the long-term outcomes we can get for members.”

In 2020, HESTA became the first major super fund to commit to net zero across its portfolio by 2050. The zero emissions target was preceded by deep analysis and grounded in the best financial interests of HESTA members, who are invested for 20–40 years, says Blakey. While it would be easier to achieve the climate target by divesting high- emitting companies from its portfolios, HESTA prefers active ownership and engaging with those companies to try to drive down carbon emissions.

“This really goes to the heart of what we believe our role is, because climate change is such a global systemic issue,” says Blakey, who has a BSc in mathematics and computer science from the University of KwaZulu-Natal in South Africa. “It will impact our members. It’s going to impact economies, the environment, society. The far more effective approach is for us to remain invested and to actually use our investments with an active ownership approach to drive down carbon emissions.”

Blakey says there has been “enormous progress” in emissions reduction, pointing to HESTA’s 2030 emissions target, which it raised to 50 per cent of 2020 levels in September last year (up from the previous target of 33 per cent). The fund wants more from companies than their stated carbon reduction commitments. It also wants them to demonstrate that they have business strategies that are aligned with the United Nations ambition of limiting global warming to 1.5°C.

“We as investors have a real need to unpack what is in the statements of companies and, in particular, those large emitters,” says Blakey, noting that some 75 per cent of the emissions in HESTA’s Australian equities portfolio come from just 10 companies. “Our team’s deep understanding of these issues, of the challenges, of what’s in those climate reports — and the ability to unpack that and go deeper and actually understand the strategies — that is very important for us.”

On the watch list

At the heart of HESTA’s engagement strategy is its escalation framework. Where the fund considers that companies have failed to demonstrate adequate change, it can “escalate” the issue with one or a combination of the following: adding the company to a watch list, voting against director re-elections at AGMs, supporting investors’ climate resolutions and, potentially, divestment.

The fund put AGL, Origin, Santos and Woodside on its watch list in September last year, believing that those companies faced significant decarbonisation challenges, requiring a major shift in their strategies to offer low-carbon energy products.

“That engagement is actually very positive,” says Blakey. “What’s valued about the watch list approach is that it’s very clear — and people value clarity, even if they don’t agree with the assessment.”

A month after it was put on the watch list, Origin was removed following the electricity generator and retailer’s decision to divest its near 80 per cent stake in gas exploration in the Beetaloo Basin in the Northern Territory, and to explore exiting nearly all its upstream gas exploration permits. HESTA said the change in strategic direction will better support Origin’s ambitions to lead the energy transition through cleaner energy and customer solutions.

In March, the fund also removed electricity generator and retailer AGL from its watch list, saying it had made progress with its Climate Transition Action Plan, but adding there was additional scope for AGL to continue to develop its decarbonisation ambitions in alignment with the 1.5°C pathway, including bringing forward coal-fired power generation closures.

Despite the urgency of the task, HESTA wants the transition to a low-carbon economy to be timely, orderly and equitable, which is important in ensuring a just transition where no workers or communities are left worse off by the change. The fund is an active participant in the just transition, says Blakey, and is considering how it can allocate capital and invest in a way that vulnerable communities have alternative income streams in the future.

More equitable super

HESTA has welcomed the Albanese government’s plan to enshrine in law the purpose of the superannuation system, which the government defines as, “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

Along with bringing “real clarity” to the purpose of super, it will also give HESTA a platform to campaign for a more equitable superannuation system. “We believe this year is a fork in the road, because we are having the dialogue and we have the opportunity to ensure that there is dignity in retirement for all Australians,” says Blakey.

As a fund for workers in the female-dominated health and community service sectors, the HESTA membership base is 80 per cent women. The fund wants super to be paid on the Commonwealth Parental Leave Pay scheme, because working mothers collectively miss out on nearly $2.8b of super, which is not paid during parental leave.

It also wants expanded eligibility for the Low Income Super Tax Offset (a government superannuation payment of up to $500 to help low-income earners save for retirement) for all superannuation tax concessions to cut out for balances above $5m, and for tax concessions to be distributed more equitably.

“If we look at the past three years with the pandemic and the role of members working in health and working in frontline community services, they could have [had] a better deal in terms of the spread of those tax concessions,” says Blakey.

As home affordability has declined in Australia, calls for the superannuation system to double as a vehicle for young people to save for a home deposit have intensified, but it is a move Blakey remains opposed to. She feels that Australians shouldn’t be expected to choose between home ownership and saving for a dignified retirement, and that early withdrawals from super should only be a last resort to employ in tough times.

However, she does see a potential role for the super system in nation-building projects, as Treasurer Jim Chalmers has suggested. In August 2022, the Treasurer said that the $3.4 trillion superannuation sector could be used to address the nation’s most formidable economic challenges, including housing and energy. Blakey agrees, but with the caveat that HESTA’s objective is to deliver the best and strongest long- term returns for members that it can.

“Alongside that, if we work with government and alongside other investors, we can find ways to achieve those long-term return objectives for our members — at the same time as using the stable long-term patient capital we have in superannuation for the benefit of Australians,” she says, singling out affordable housing and the energy transition as areas of interest.

CEO-director knowledge nexus

Aside from HESTA, Debby Blakey GAICD sits on several industry boards. She is the sole Australian representative on the board of the International Corporate Governance Network, the global body representing institutional investors for the advancement of good governance. Her participation provides her with a perspective on where investors can influence change and advocate for increased standards of stewardship.

Locally, she is also president of the Australian Council of Superannuation Investors and a board member of the Association of Superannuation Funds of Australia. Sitting on boards is a “wonderful complement” to the role of CEO, providing a view of governance and oversight that makes for a more effective CEO, says Blakey.

“As a CEO, that’s incredibly important, because you’ve always got to be looking up and looking out, being aware of what’s out there, the enormous opportunities, but also what’s coming your way,” she says. “Every CEO should have governance exposure and should be on a board. It gives you an amazing understanding of the role of the board.”

She encourages all the HESTA executive team to do the AICD Company Directors Course and to take board positions, because executives must understand the role of the board if the business is to get the best out of it. “We understand, as management, the role we play in preparing great papers... in the flow of information to a board, that you set the board up to have the amazing conversations they come to have.”

The climate cliff

In 2019, HESTA engaged Mercer to undertake a scenario analysis to understand the potential impact of climate change on its investment portfolio if no climate action was taken — as part of its TCFD disclosures in line with the Paris Agreement. In the report, Our Path to Net Zero, the analysis considered the impact of different future climate-related scenarios on HESTA’s portfolio (based on holdings at the time of analysis) using gross domestic product (GDP) impacts as a proxy for the economy at large, finding the key risks were twofold:

Near-term

The risk of market repricing from an abrupt and disorderly policy/market transition from the current 3°C trajectory onto a <2°C pathway.

Long-term

The long-term risk is the likely increase of the existing effects of climate change. Negative return impacts are most severe in the 4°C+ by 2100 scenario, where increasing frequency and intensity of climate change impacts lead to economic and social damage.

“In a scenario where the world successfully transitioned onto a pathway that limits global warming to below 2°C (green line) then we expect positive impacts from increased investment in low-carbon infrastructure to 2028, but negative overall impact to current portfolio holdings to 2050,” the report said. “The reason for this is ultimately that the economy at large, and therefore the HESTA portfolio, does not yet reflect the future state required for a low-carbon world. In a transition to low carbon, current investment in fossil fuels and some industries would therefore lose value. In a scenario where the transition is slow or unsuccessful, and the world continues on its current trajectory (3°C) or warming gets worse (4°C), the modelling suggested negative impacts from an increase in the severity and frequency of extreme climatic events.”

This article first appeared under the headline 'Making Your Voice Heard' in the May 2023 issue of Company Director magazine.