1. Background and Context
On the 3rd of March 2022, the Federal Government announced, that in light of the ongoing Russian invasion of Ukraine and the continuing escalation of sanctions imposed against Russia in response, that it has strong expectations that Australian superannuation funds will review their investment portfolios and take steps to divest holdings in Russian assets.
The Financial Services Council (FSC) supports the Federal Government’s expectation that the superannuation industry divests Russian assets as part of broader global economic sanctions to address the humanitarian crisis in Ukraine.
The FSC acknowledges the close integration of superannuation and non-superannuation investment assets, as such the FSC has developed this for both superannuation trustees and fund managers, that invest capital directly or indirectly on behalf of superannuation trustees, to meet the Government’s expectations.
2. Date of Issue
This Guidance was issued 5 April 2022.
This Guidance commences on the date that it is issued and is intended to set out guiding principles for:
- superannuation trustees;
- asset managers directly investing superannuation capital; and
- asset managers operating managed investment schemes with superannuation funds as investors;
to give effect to the divestment of Russian assets consistent with the Government’s expectations and respective legal obligations.
4. Steps that Trustees will take
Whilst ensuring that they comply with all legal obligations, Superannuation Trustees seeking to follow the Federal Government advice should consider how best to take the following steps (some of which may have already been implemented):
- implement all sanctions on Russia imposed by Australia;
- prohibit the purchase of new investments in Russian Assets;
- review their investment processes for making decisions on the divestment of Russian Assets;
- develop a plan to divest Russian Assets as market conditions permit that is consistent with their legal duties;
- divest direct portfolio holdings of Russian securities in accordance with their members’ best financial interests;
- divest from, and prohibit the use of, new derivatives or structured arrangements that undermine the expectation of divesting Russian Assets, as market conditions allow; derivatives and Russian exposures obtained through structured vehicles will also be unwound or closed out, as market conditions allow;
- have appropriate compliance resources to achieve these objectives; and
- review product disclosures to ensure they remain appropriate and consistent with legal obligations.
5. What is a Russian Asset?
Russian assets include:
- Public market assets including listed equities, hard currency and local currency Russian sovereign debt, and fixed income securities issued by Russian corporations. Superannuation Trustees may rely on the country classification by an independent market index or data provider such as MSCI, S&P, FTSE, Russell or Bloomberg for the purposes of identifying Russian public market assets;
- Private market assets domiciled in Russia such as private equity or unlisted assets domiciled in Russia;
- Co-mingled products where greater than 50% of the underlying assets by market value are Russian domiciled assets; and
- Russian currency balances.
6. Issues in relation to ownership and control
Superannuation assets are invested through different structures and with different investment strategies, including directly held assets, external mandates, actively or passively managed investments and co-mingled investment arrangements with Australian and international fund managers.
Superannuation Trustees ability to divest Russian Assets will be influenced by the degree to which they own assets, whether outright or co-mingled, or have control over assets.
Where a Superannuation Trustee has ownership and control they will divest Russian Assets in accordance with the policies and processes they will establish as per Section 7 of this Guidance.
Where the Superannuation Trustee does not have the ownership or the control to divest, the Superannuation Trustee will consider the degree of ownership, control and influence they have in determining what actions are to be taken with respect to Russian Assets. This includes consideration of whether to exit investment in the fund as well as fiduciary and legal duties. Superannuation Trustees will also do this in an orderly fashion which continues to meet the best financial interests of members.
- They will identify public market assets that they directly hold or have control over through the investment mandate and direct the asset manager to divest when market conditions allow, and in a manner consistent with their duties; and
- Where they do not have the ability to control the investment, for example the Superannuation Trustee is a minority unit holder in a fund, they will strongly request the asset manager to divest of Russian Assets, noting that in such circumstances the ultimate decision and process for divestment rests with the investment manager and who is also subject to their own legal, fiduciary and responsible entity duties.
7. Trustees defining the divestment processes that they will undertake
Superannuation Trustees will implement an approach to identify which Russian Assets will be wound down and divested as market conditions permit and in a manner consistent with their duties.
Public market assets: For public market assets this will identify which securities will be divested.
Private market assets: In relation to private market assets domiciled in Russia Superannuation Trustees will establish the level of revenue or assets that will identify which private market assets are to be divested as market conditions permit.
Derivatives: Superannuation Trustees will not use derivatives or structured arrangements to undermine divestment of Russian Assets.
Russian currency: For the avoidance of doubt the cash proceeds from divestment will be repatriated out of Russia in accordance with best financial interest obligations and as market conditions allow.