The Your Future, Your Super (YFYS) performance test is flawed because it encourages trustees to avoid environmental, social and governance (ESG) investing in favour of approaches that will achieve short term performance.
Speaking at an IBR conference, Amanda Rethus, director, GatewayInvest Consulting, said further work needed to be done to incorporate different investment approaches, such as ESG and alternative asset investing.
Adding to Rethus’ thoughts, David Bell, executive director, The Conexus Institute, said the impact investing, opportunistic investing, and exclusion components of ESG investing created “so much tracking error that they would not be primary tools that super funds would use in the future”.
“And unfortunately, this will come out once the performance test is applied to choice options [and] there’s a real existential threat to some of these strategies,” Bell said.
He said super funds would be left with engagement as their primary tool to manage ESG and climate risks – something he viewed as lacking in transparency.
“Unfortunately, that tool is a very hard one to understand how much activity is being done because a lot of the funds, perhaps for very positive reasons, like to engage [with companies] behind closed doors, not publicly,” he said.
“And so, it’s a leap of faith to say we trust that fund A is doing as much engagement as fund B.”