Linking superannuation and sustainability

Below we provide some common links between superannuation and sustainability. For LGS these links demonstrate that adopting a systematic approach to managing ESG risk in our investments is entirely consistent with, indeed will assist, our fiduciary duties of acting in the best interest of our members and achieving strong long term investment returns

Long term

ESG or sustainability type risks are long term in nature. As a superannuation fund, LGS also has to adopt a long-term approach to managing risks for our members - both in saving for their retirement and then in providing them with retirement incomes.

Future looking

Super funds also have to position their investments for the future. Likewise, many sustainability issues are likely to become more material in the future. For example:

• The transition to a low carbon economy due to concerns in regards climate change. This creates investment risks from the physical impacts and regulatory responses to climate change and also provides investment opportunities in investing in technologies and companies that offer low carbon products and services
• Increasing societal expectations for well governed companies
• Increasing demand for natural resources due to booming population growth
• Increasing wealth in lesser developed countries
• Ageing demographics

Universal ownership.

Many sustainability issues arise from the economic concept of 'externalities' - being the unintended consequences of an activity. Pollution is a classic example of an environmental externality - the company does not have to pay the full price of the pollution. Health problems arising from smoking or gambling are examples of social externalities - the companies do not pay the full price to address the adverse side effects.

The nature of financial markets means that investors are short term in their investment horizons. Investors can usually easily sell their investments if they see that a company may have regulation costs imposed on them to address the externality they are causing.

Superannuation funds however are not only long term and future looking, but are also 'universal owners'. The fundamental investment principle of diversification means that superannuation funds, LGS included, are investors in thousands of companies and projects around the world.

As a universal owner, a super fund cannot avoid negative externalities - we may be invested in the company that may benefit financially by not fully pay for their externality, but we are also invested in all the companies and sectors that feel the negative financial, environmental and social impact of that externality .

As a long term, future looking universal owner, LGS believes that the continuing prosperity of the economy and the well being of members depends on a healthy environment, social cohesion and good governance of the companies in which it invests. This underpins a favourable ground for investing members' funds and enables the LGS Trustee to not only fulfil its fiduciary duties but also to invest in a way that favours companies and projects which show a commitment to our community and the environment.

For more information, please refer to the Glossary of Responsible Investment terms