Mining and superannuation (pension) funds: they 'go together like' that impossible to remember line from the hit movie Grease. However, in this instance we're not talking about you and your particular fund, or explaining why it's important to have a super or pension fund.
Rather we're talking about the huge growth in these funds, the unprecedented power the big guns of the pension and superannuation industry can now wield, and the effects of this on industries like mining.
Today, superannuation and pension funds are among the biggest shareholders on the world's stock exchanges. Notably, Deloitte believes around 60% of shares on the Australian Securities Exchange will be owned by super funds within the next two decades. There's also growing consensus that over the next 10 years we'll see the emergence of a handful of mega funds created by mergers, and takeovers of smaller funds. When that happens, it could well change some of the fundamentals that underpin many economies.
Australia's superannuation and mining industries
When it comes to the potential effects of super fund growth on industries like mining, Australia is probably one of the best countries to study. It's a major mining economy with a huge superannuation pool. However, similar scenarios would be playing out elsewhere where there are both large mining industries and large pension or super pools.
On the mining front Australia ranks second behind China, whilst its super pool is now the fourth largest in the world. As of 31 August 2020, it was worth AUD$2.9 trillion. Only Japan, the US, and the UK have bigger pools. The size of Australia's pool is largely due to the Superannuation Guarantee Contribution (SGC) AKA compulsory employer super contributions. Currently this SGC is 9.5% of the employee's ordinary salary or wage.
The lucky country
Thus far Australia has remained largely insulated from the shocks of global recessions, living up to its reputation as 'the lucky country'. Therefore its mining and other core industries have been able to continue carrying out business almost as usual, a huge boon during these times. This could be about to change though...
Australia's super funds themselves are certainly not among the biggest in the world. Nonetheless they are already outgrowing the local economy and increasingly looking overseas for investment assets. Such investments will see Australian capital take on a bigger role in international asset markets, particularly lucrative mining stocks.
However, it will also bring new risks to the Australian economy by making it more vulnerable to the ups and downs of those global assets. Therefore investing funds are looking for companies that are stable, well managed, and able to demonstrate that they have clear ESG (environmental, social, and governance) criteria in place. That will place a lot of pressure on companies, particularly in the mining industry where adequate ESG can be a weak link in the chain.
Indeed, there's little doubt that as super funds ramp up their investment in businesses, it's going to flush out those whose ESG and asset management isn't up to par. Investors expect results. They're going to invest in companies that have clear business strategies, and are investing in research and development that will back up those strategies. The ones that don't will either have to shape up, or lose out.
Industry super/pension funds: Wielding big sticks
When it comes to exercising clout, industry and public sector super/pension funds in particular are renowned for it. These funds have championed the push for companies to have more female board members for instance. They are also noted for jumping on board with environmental, humanitarian, social and governance causes because their own members expect it.
After all, in the highly competitive world of pension funds and superannuation, these funds want members. That increasingly means adopting policies that are deemed important and currently climate and environment are right at the top of that list. Then there's the fact that many of the board members themselves have strong leanings in this direction.
That can make for an uncomfortable relationship between super funds and mining companies. Notably, Australian industry and public sector super funds use an 'equal representation' model of governance. In other words, their directors are a roughly 50/50 mix of representatives from member unions and employer groups. This eclectic mix can and does cause problems for conservative companies when their interests and activities don't dovetail with those of the super funds investing in them!
Granted, many super funds say they prefer to remain neutral. Their business after all is not telling the businesses they're investing in how to run those businesses. But ... super funds ARE in the business of making money from their investments. If those businesses aren't doing that then yes, super funds will increasingly have the clout to throw their weight around.
Should mining executives be worried about super funds?
When super funds own a large proportion of the share market, it gives them unprecedented powers to call the shots as they see fit. Australia's biggest super fund AustralianSuper for instance recently informed the Minerals Council of Australia that its policies on climate change are 'not good enough' and that it 'needs to do more'. Among other things, the fund is unhappy about the council's continued support for the coal industry.
Mining major BHP has also been put on notice by investors that their membership of the Minerals Council doesn't sit well with BHP's own expressed environmental culture and that perhaps they should be rethinking it. Not surprisingly, BHP has announced it will be reviewing its membership of industry groups to ensure that the ones they are members of are aligned with their own goals around climate change, the environment, and humanitarian issues.
BHP isn't / won't be alone in facing this challenge. The mining investment community is becoming increasingly concerned about humanitarian, climate and environmental issues so the pressure is on for companies to lift their game around these issues. If they don't investors will walk away and take their money with them. When the biggest investors are super funds, you begin to see the type of clout this industry will have! It's also possible that mega super funds will have get enough shares in companies to demand seats on boards, thus increasing their influence.
Overseas companies won't be immune either. As the anticipated mega funds begin to emerge around the world, they'll be seeking global investments. That means a mining company in South Africa for instance could wind up with an Australian super fund as a majority shareholder (and vice versa). If that super fund is committed to certain environmental, climate and humanitarian goals, it may put pressure on that company to comply with its agenda.
Climate Action 100+
Furthermore, a group of some 450 global investment funds that includes AustralianSuper (Australia's biggest industry super fund), Japan's Government Pension Investment Fund (currently the world's biggest pension fund) and CalPers, a Californian state pension fund, have formed Climate Action 100+. According to their website, it is "an investor initiative to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change." Loosely translated, that means 'clean up your act or we aren't interested in investing in you.' Collectively the group members control over $40 trillion in assets.
The group has identified 161 companies globally that are contributing over 60% of global industrial greenhouse gases via Scope 1, 2 and 3 emissions. Not surprisingly, several of the big miners made that list - BHP, Rio Tinto, Glencore, Vale, Anglo American et al. Another of the group's current priorities is taking on industry associations like the Minerals Council of Australia over their climate change agendas when those agendas don't meet the goals of their member companies. According to investors, inconsistencies like that pose a business risk for them.
So yes, miners should be mindful of the growing influence super and pension funds have via their investment portfolios. They should also be aware that a growing number of those funds, in response to the concerns of their own membership, are committed to a range of environmental and humanitarian causes that in the past would likely have put them on a collision course with the mining industry. In a nutshell, super funds are getting choosy about who they invest in, and given their growing clout in investment circles, that's something the industry needs to take heed of.