On 24 July 2018 Mark McVeigh (McVeigh), a 23-year-old, commenced proceedings in the Federal Court of Australia against his super fund, Retail Employees Superannuation Fund Pty Ltd (REST) to require REST to provide him with information on how the fund is managing the risks of climate change.
McVeigh has been contributing to REST for 5 years. He wrote to REST in August last year asking how the fund was managing the risks involved in investing in companies that either contribute to or are at risk of climate change, including fossil fuel companies, as he believes that these investments could be at risk in the next few decades.
After REST refused to provide details around how it is managing climate change risk, McVeigh decided to commence proceedings to require the trustees of REST to provide information around what the trustees know in relation to the impact that climate change will have on REST’s investments, and what the trustees are doing in response to that knowledge. In other words, McVeigh is seeking to understand what measures REST is taking to protect his retirement savings from potential risks associated with climate change.
The case will likely be watched carefully by the superannuation industry, as the Federal Court will be asked to apply established principles of trust law to novel facts which may be symptomatic of an increasing desire for the beneficiaries of superannuation funds to have greater insight and understanding about what, if any, risk management strategies have been put in place by the trustees responsible for the investment and management of their retirement funds.
Do you trust me?
Members of a superfund are beneficiaries of a trust. Accordingly, the trustee of the trust will owe them a number of duties. In Spellson v George (1987) 11 NSWLR 300, Powell J stated at 315-316:
“At the risk of being regarded as overly simplistic, it is as well to start with the fundamental proposition that one of the essential elements of a private trust … is that the trustee is subject to a personal obligation to hold, and deal with, the trust property for the benefit of [the beneficiaries]… It is, so it seems to me, a necessary corollary of the existence of that obligation that the trustee is liable to account to the [beneficiaries], and that being so, the trustee is obliged not only to keep proper accounts and allow a [beneficiary] to inspect them, but he must also, on demand, give a [beneficiary] information and explanation as to the investment of, and dealings with, the trust property.”
The duties flowing from this and other cases can be summarised as follows:
- trustees hold the trust property for the benefit of the beneficiaries;
- as part of this duty, beneficiaries are able to hold the trustee to account; and
- so the trustee can be kept accountable, they are obliged to keep accounts and provide these, or other information, to beneficiaries upon their request.
One exception to the production of documents and information, is that when it comes to an exercise of discretionary power, a trustee is not obliged to disclose material evidencing the reasons why they made a particular decision: Hartigan Nominees Pty Ltd v Rydge (1992) NSWLR 405, 434.
If the trustee is required to hold the trust property for the benefit of the beneficiaries, a question arises as to how it can be used. It is well established that the ‘general rules of equity’ impose a duty on trustees of ‘investing trust funds’ that the trustee has not requested to be distributed: Wharton v Masterman  AC 186, 197.
How the trust funds are to be invested will turn on the terms of the trust deed. REST’s trust deed is broad, with clause 9 providing a number of modes of investment, including ‘any investment authorised by law for the investment of trust funds’.
The leading authority on the modes of trustee investments is the judgment of Viscount Megarry in the English case of Cowan v Scargill  2 All ER 750 (Cowan). In this case, the National Coal Board established a pension scheme for mineworkers. There were ten trustees, five appointed by the board and five by the mineworkers’ union. The trust deed provided for wide powers of investment. The union trustees refused to approve the 1982 periodic investment plan unless it was amended to remove overseas investments and investments in all energy sources other than coal. The trustees appointed by the board applied to the Court for directions.
In finding that the union trustees were in breach of their fiduciary duties, his Lordship set out the following relevant principles:
- ‘The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries … this duty of the trustees towards their beneficiaries is paramount… When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.’
- ‘In considering what investments to make trustees must put on one side their own personal interests and views. Trustees may have strongly held social or political views… In the conduct of their own affairs, they are free to abstain from making [certain] investments. Yet under a trust, if investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reasons of the views that they hold. Trustees may even have to act dishonourably (though not illegally) if the interests of the beneficiaries require it.’
- An exception exists where, for example, ‘the only actual or potential beneficiaries of a trust are all adults with very strict views on moral and social matters… The beneficiaries might well consider that it was far better to receive less than to receive more money from what they consider to be evil and tainted sources… But I would emphasise that such cases are likely to be very rare.’
From the above, it is clear that Cowan is authority for the proposition that trustees have a duty (subject to contrary direction in the trust deed) to make investments that advance the financial interests of beneficiaries (so long as they are legal), notwithstanding their political or social views. Trustees can take into consideration the views of the beneficiaries, but unless all of the beneficiaries have strong views about the investment, this will not justify an investment that prejudices the financial interests of the beneficiaries.
A changing climate for superannuation funds?
It is unclear whether McVeigh’s request for information with respect to the measures that REST is taking to manage the impact of climate change on its investments will be successful in the Federal Court. The case is next before the Federal Court for directions on 28 August 2018.
Although McVeigh is entitled to inspect trust documents as a beneficiary of REST, the trustee has a right to exercise discretion as to the mode of investment and a duty to obtain the best financial return for REST’s beneficiaries. Furthermore, the trustee is not obliged to disclose the reasons for its exercise of this discretionary power or the information which influenced those reasons.
However, given the potential long-term financial impacts of climate change, and a shifting understanding of how those risks can or should be managed, there is increasing scrutiny on trustees whose obligations are to protect the long-term financial investment of superannuation funds, particularly in relation to young people whose financial futures will be most directly impacted by any investment strategy which does not consider or mitigate risk considered over the long term.