Speaker 0:
joining me now in this exclusive interview for the E s G virtual conference. Ian Patrick, chief investment officer at the Australian Retirement Trust. Welcome, Ian.

Speaker 1:
Yeah, good afternoon or good evening. My time. Sorry.

Speaker 0:
So, Ian, take us through who the Australian Retirement Trust are. And who are the members that the trust serves?

Speaker 1:
Sure. So, uh, Australian Retirement Trust is a a recent phenomenon in the sense that it's the product of a merger of two funds that were fairly substantial in their own right.

Speaker 1:
So it's a little over 14 months old. It is a

Speaker 1:
not for profit fund as we talk about it. It serves 2.2 million members and has assets of 240 billion or thereabouts.

Speaker 1:
The trust has a membership all over Australia. Although the majority of members are located in the state of Queensland

Speaker 1:
and in all other respects, it's emblematic of the Australian, uh, population. 50% female, 50% male, uh, has spread across the age spectrum members who have just started their working life all the way through to people well into the drawdown of the pension.

Speaker 0:
So, Ian, are there specific industries that your member based is mostly predominated in,

Speaker 1:
um, it's it has a concentration in what I refer to as the people who look after your and my well, not yours. But my and my family's well-being in the sense that there are nurses, doctors, teachers, policemen, ambulance, uh, professionals

Speaker 1:
who cater to the populace of Queensland. That is the former Q Super fund.

Speaker 1:
Beyond that group of public servants who cater to my and my family's well-being effectively,

Speaker 1:
the breadth of industry that's covered by the remaining of membership is exactly what you'd anticipate. Everything from a corner store that serves, um, coffee and and and sandwiches all the way through to some of the large, uh, financial institutions we have. Uh, P W. C. For A, for argument's sake is a Big Four accounting firm their employees are part of of Australian Retirement Trust

Speaker 1:
A, as well as some of Australia's largest, um, manufacturers like Blue Scope AAA large steel manufacturer.

Speaker 0:
So and there's been a steady trend of consolidation, and I know you mentioned the Australian Retirement Trust was the result of the merger between Q Super and Sun Super. So we're seeing this trend taking place globally. What is the motivation behind this trend of consolidation. And how is it benefiting retirement funds?

Speaker 1:
Yeah, it's a It's a fascinating phenomenon,

Speaker 1:
I think, driven by defined contribution. Now why Why do I say I think, driven by defined contribution, fundamentally defined contribution funds or, as they're known here in Australia, accumulation funds

Speaker 1:
have a far more, um, intense member service element. Defined benefit is fairly straightforward. You make a calculation when the person leaves the fund based on their salary and you pay them out. And there's an underlying, uh, commitment from the employer to make good the funding of that payment. It's fairly straightforward in defined contribution. As you'd know, you have the promise

Speaker 1:
to, uh, accumulate money and then to put that money to work in a pension. Uh, once a person hits retirement, the entire member service value chain in defined contribution

Speaker 1:
in terms of engaging a member to encourage them to contribute, engage them in making the right investment decision. Those are really scale games to invest in the investment platforms, the member co communication activity, all of that sort of thing. And I think that has been a a contributor to driving, uh, consolidation. But beyond that fundamental, um

Speaker 1:
underpin or or reason There is the the fact that you can develop benefits at scale or services at scale and drive, uh, negotiations harder with service providers,

Speaker 1:
and that has been a key focus. These are complex financial organisations at the end of the day, and whether you see it in banking or insurance or any other financial services, organisation, scale matters. And I think that's been the case, certainly in accumulation funds in Australia. But I I warrant generally around the world, too.

Speaker 0:
Absolutely. So I'd also like to get an understanding with this consolidation trend. How does it affect fees? And is there a certain element that brings down the fees for members?

Speaker 1:
Oh, there there's no doubt in my mind and I've been part of the space war. Um, you know, getting on 20 years in Australia. There's no doubt in my mind that it enables, um, the scale enables one to drive down fees.

Speaker 1:
Um,

Speaker 1:
we might have been paying in the start of our time at, uh Sun Super, which is one of the predecessor funds of Australian Retirement Trust,

Speaker 1:
100 basis points for real estate investment management. Today we're down at the, um, mid fifties in terms of basis points. That's been a function of a combination of larger assets and hence a capacity to drive down the let's call it the graduated scale of fees, but also simply negotiating power, um, through

Speaker 1:
turning up to managers and saying we're gonna be a bigger part of your business. And we want to derive some benefit of that scale to you for our own end user, the member.

Speaker 0:
So locally, the retirement fund industry is governed by Regulation 28. I want to get an understanding on the Australian side of of the world. Um, what regulations underpin? Um, the allocations of retirement funds And what are the economic principles that that it supports?

Speaker 1:
The principal, um, framework for, uh, regulation in Australia is something called the Superannuation Industry Supervision Act. Or as it's often referred to the S act SI s and um, that outlines the requirements to be met by all regulated super funds,

Speaker 1:
starting with the principle that there has to be a sole purpose the the delivery of a retirement benefit and then a a series of supplementary requirements under that sole purpose that go to, um, the governance framework, the covenants that need to be met in executing on the investment strategy, all of that sort of thing. Now, regulation here has evolved like it does anywhere else in the world. Um,

Speaker 1:
when I first arrived in Australia, uh, there was not compulsory preservation. Today, there is compulsory preservation,

Speaker 1:
uh, back in the eighties and nineties. I understand that's prior to my time. There was directed assets, uh, requirement to invest in certain, uh, places, including government bonds. Today, there is no regulation that governs direction of assets,

Speaker 1:
but, um, over and above that there are some requirements in the corporations act the the primary bit of legislation that governs companies that are applicable to, uh, the retirement fund industry. There are other requirements that impinge on on the superannuation funds, but the primary piece of legislation is the I s act.

Speaker 0:
So, Ian, you've mentioned compulsory preservation. Is it proportional? Are members allowed to access a certain proportion of their retirement savings, or does 100% have to be preserved?

Speaker 1:
In essence, 100% has to be preserved. There are unique circumstances, uh, under which a person could gain what's deemed early access. Financial hardship is one. And then, for instance, during the covid period, there was a specific, um exemption to allow people to access

Speaker 1:
in two successive um, bouts of $10,000. They could access up to $20,000 from their retirement savings. But that is by far and away the exception.

Speaker 1:
The general rule is, once the money is, um, allocated to your superannuation account, you may only get access to it as preservation, age and preservation age is close to or at retirement.

Speaker 0:
And so, with emerge emerging markets such as South Africa, um, impact investing has seemed to be quite a predominant theme for developed nations. How does impact investing fall into the priorities of the fund?

Speaker 1:
Yeah, it's an absolutely fascinating question, because

Speaker 1:
if I almost take it to a higher level and it's not a unique construct, I you hear many people talk about it. There is no doubt that if it was risk and return on two axis, there is a third access today that everybody's, um, focused on, and that is impact. But that's not in the context of impact investing. Every investment we make has an impact. Some of it harmful or, um, arguably

Speaker 1:
depending on your definition of harm, quite a bit of it Harmful.

Speaker 1:
What

Speaker 1:
is traditionally spoken about as impact investing is where you are having a desired positive impact.

Speaker 1:
And I would go so far as to say, uh, impact investing in Australia would be typically seen as I've identified what impact I want to have.

Speaker 1:
I can define the measures that will determine what that, uh, success in having that impact looks like. And I can use those measures to report out to my constituents in our case, the members who invest in the fund. Now that level of impact investing is fairly, um, measured in Australia.

Speaker 1:
But in terms of how we think about it at Australian Retirement Trust, we aim to understand, to the extent possible, the impact that we're having good or bad, from every investment impact in an environmental context, impact in a social context and impact in an in a governance context, the typical E s G trilogy. But in terms of directed impact investing,

Speaker 1:
I would say that is a, um, very small proportion of the vast majority of assets invested in Australia.

Speaker 0:
So, Ian, you've mentioned it's a very small proportion of the assets and the management that are allocated to say impact projects. Perhaps you can take us through one of the impact projects that, uh, the Australian Retirement Fund undertakes.

Speaker 1:
Sure. So one of the key focus points, um, in Australia more recently has been affordable and social housing.

Speaker 1:
And the affordable piece particularly is interesting because

Speaker 1:
many, many cities have had

Speaker 1:
phenomenal increases in the price of housing to the point where many first time or would be first time home homeowners are actually excluded from the market and spend either many years saving for a deposit or alternatively bank, Uh, depending on the bank of Mum and Dad to be able to finance their first home.

Speaker 1:
And and so affordability has become particularly, uh uh higher in terms of focus. We've aimed to, uh, partner with both the Queensland government

Speaker 1:
and an affordable housing provider called the Brisbane Housing Corporation,

Speaker 1:
in a commitment to be part of the finance structure for the development of affordable housing.

Speaker 1:
Now what makes

Speaker 1:
us still generate an economic return

Speaker 1:
is there is a contribution to the rentals that we receive from the Housing Australia Fund, effectively which is a fund set up to allow eligible, um, rental subsidies.

Speaker 1:
But we provide senior debt. Finance is the objective. And then, um, the rental is part subsidised, and then the the occupier of the home pays a subsidy, and we have a a very efficient developer in place. Now, that's the kind of impact investment that we're engaged in.

Speaker 1:
We also think deeply about, uh, energy transition investments as an alternative, um, source of impact investing. But in terms of others that I might think of, like, microfinance or, um, uh, development of of banking in underserved communities?

Speaker 1:
Um, no. Which is how I think of what the focus might be in emerging markets. No, we don't have, uh, exposure to Australian retirement trust to those. But it does actually bring to mind one of the things that I think is important when one thinks about impact. Investing is that concept of an underserved market

Speaker 1:
to have genuine impact. You wanna be, uh, attract or providing finance to an under served market and therefore developing that that market. And, uh so as we move forward and it is, uh, an area of some focus for the fund as we move forward on impact investing. We will be looking to that concept of underserved markets.

Speaker 0:
So I to close off the session. I want to understand how the Australian Retirement Fund integrates E S G and responsible investing within the investment decisions across asset classes. And how does it relate to member Centricity?

Speaker 1:
Yes, so So that's a fascinating question. I, which I I've never heard asked before. How does it relate to member centrality?

Speaker 1:
And the way I approach that answer is to say,

Speaker 1:
at the end of the day, our primary objective and it's set out in legislation

Speaker 1:
is to to to invest in members, best financial interests.

Speaker 1:
Now the regulation goes further to say you may have a secondary objective

Speaker 1:
for your investments, but the primary objective has to be best member best financial interest. So, as a consequence, I'd say from a member Centricity point of view,

Speaker 1:
we would think of integrating E S G as the capacity good E s G management as being the capacity to enhance returns or reduce risk. Now it's it's clear, I think, when one contemplates the environmental climate change

Speaker 1:
that being thoughtful about the future risks, particularly technological or physical risks that might, um, be imposed on assets into the future.

Speaker 1:
That by thinking through that risk climate change risk one is delivering, ultimately a better investment return to the member. It might only emerge over 10 or 20 years, but one is doing that. And I think the same is true around, uh, social issues like,

Speaker 1:
um, modern slavery.

Speaker 1:
If we If we invest in a in an organisation that engages in modern slavery,

Speaker 1:
then we're at potential risk of regulation. Or, um,

Speaker 1:
yeah, probably regulation mostly. But also capital strike on those entities, reducing their value and and therefore undermining the return that we earn. And and with governance, if we have a board that's weak on its workplace health and safety practises that can impinge on the reputation of the organisation concerned, drive down the value and impinge on on the return. So

Speaker 1:
going back to the member Centricity question, which I do like is we're about delivering good risk adjusted returns. If we can manage the E s G risks inherent in the future operations or or um, activities of our companies, we should be minimising the risk of a surprise. And hence uh a depletion or a an an impairment of capital

Speaker 1:
and therefore should be delivering to our member central concern, which is the return, as I say.

Speaker 1:
So how do we do it? Which I think was the start of your question. We integrate consideration of E S G risks into all our investment decisions. To the extent possible. There's not good data on each and every one of those risks.

Speaker 1:
But every asset allocation decision Every, um, manager selection decision, every asset purchase decision that comes to one of our management or board investment committees. Each of those has an E S G specific consideration built into the recommendation that's had the involvement of the E S G professionals in our team. And those risks are, um, examined and factored

Speaker 1:
quite deliberately into the investment decision. We think integration is absolutely critical to the delivery of a thoughtful stream of investment returns over time.

Speaker 0:
Yeah, and so, with such large scale, a lot of the the companies that you hold within your equity portfolio or fixed income portfolios would experience this pressure of having to report certain E S G metrics. Green washing has been quite a problem globally. Perhaps you can tell us then what Green hushing is

Speaker 1:
green hushing? Yes. So green. Um, hushing is where? Due to fear of being called out for green washing. One is reluctant to talk about,

Speaker 1:
for instance, the approach to climate change considerations in investment. And

Speaker 1:
it's a function of I. I. Green hushing, I believe, is a function of possibly two. Things are quite different opposite or quite different ends of the spectrum. One is that regulators have become very focused on

Speaker 1:
companies being able to demonstrate they do what they say, or or investors like us being able to demonstrate. We do what we say. If we say we don't have investments in thermal coal producers, we should be able to demonstrate through disclosure of all our holdings that none of the companies that are categorised by MS. C. I or other sources as thermal coal producers exist in our portfolios.

Speaker 1:
Now

Speaker 1:
green hushing in that instance is, we would say nothing. We would be ST about whether we have a thermal coal exclusion or we don't for fear of being caught out, that there's a fractional holding in some entity that has a small source of revenue from thermal coal in the portfolio. Now, I don't think that's productive. At the end of the day, green, um, being reluctant to hold a position because of having that fear.

Speaker 1:
I said there were different ends of the spectrum. The other is the

Speaker 1:
There I say it the US beer, which is

Speaker 1:
that everything that is e s G related is woke.

Speaker 1:
And for fear of being called out as being woke. You don't say something now, That's another negative, in my view of of, uh, green hushing. But it is the world that we live in. People are fearful of what they say And, um, being called out by a special interest group somewhere either on the environmental end of the spectrum or the, um, conservative end of the spectrum as being, um uh, well, sorry

Speaker 1:
called out on either end of those spectrums

Speaker 1:
as having made a false statement and therefore being vilified for that false statement.

Speaker 0:
Absolutely. Thank you so much for explaining that to us, Ian. It was a pleasure hosting you. And we look forward to seeing you again soon.

Speaker 1:
Yeah, Thanks, Chloe. And and thank you to anybody who listened