The Your Future Your Super reforms will make climate change engagement more difficult and push portfolios back towards a strategic asset allocation approach, according to the Thinking Ahead Institute.
In its submission to the government’s proposed legislation, the institute said the industry would either observe or participate in the biggest and “most rapid replumbing of the economic machine history has ever witnessed” if climate change science was correct.
“These risks and opportunities will only enter the index benchmarks after the event, meaning that the reforms raise the risks for a super fund wishing to invest in anticipation of climate change. Or, more simply, the reforms will make engaging with climate change more difficult,” the submission said.
“Similarly, incorporating other ESG [environmental, social, and governance] and sustainability considerations into the portfolio introduces tracking error risk relative to the performance benchmark, which may not be rewarded over the timeframe before the performance test ‘bites’.”
It also said the reforms would push super funds away from a total portfolio approach and back towards a strategic asset allocation approach.
“We would liken this to going back to an old technology, one that is inferior in return terms by around 0.5% to 1% pa,” it said.
“In effect, the reforms shift a reference portfolio from being usefully operational (a guide to the opportunity set) to being detrimentally behavioural (the management of career risk).”
It noted that other investment changes it expected included:
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