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Although super fund members want their super fund to produce a good investment return every year, many also want their money to be invested responsibly and in line with their personal values. Some super fund members feel uncomfortable with their retirement savings supporting activities like fossil fuel mining, development of armaments, or exploiting employees in third-world countries.
In fact, 9 out of 10 Australians expect their superannuation or other investments to be invested responsibly and ethically, according to research conducted in 2017 by the Responsible Investment Association Australasia (RIAA).
It’s a view super funds are taking increasingly seriously, according to the RIAA’s Superfund Responsible Investment Benchmark Report 2018. The report found that 81% of Australia’s 53 largest super funds are committed to responsible investment (up from 70% in 2016), with super funds “increasingly flexing their muscle to influence better company behaviour and contribute to more sustainable financial markets”.
With the aim of helping super fund members understand how to ensure their super account is being invested the way they want, SuperGuide has taken a closer look at what responsible investment means when it comes to super funds.
How does responsible investing work?
In the investment world, responsible investment is a process that takes into account environmental, social, governance (ESG) and ethical issues during the investment process. Traditional investing is where super funds only consider financial issues like future performance when selecting an investment asset.
When using a responsible investment approach, a super fund considers ESG and ethical issues before, or together with, the usual research and financial analysis undertaken when buying and owning an investment asset.
There are several techniques that can be used in this process, but the most common is to ‘screen’ the asset based on its involvement in a particular issue or industry. Examples include:
- Negative screening: Excludes investment in companies, industries or even countries involved in specific activities, such as tobacco, gambling, pornography, animal testing or fossil fuels.
- Positive screening: Selects companies delivering products and services which have a positive impact on society and the environment.
- Best-in-class: Invests in companies with the best ESG performance compared to their peers across all sectors, but does not exclude companies or activities based on ESG or ethical grounds.
- Norms-based screening: Screens out assets that do not meet minimum standards of business practice based on international norms, such as those defined by the United Nations on cluster munitions, human rights and labour standards.
Understanding ESG activities: what it means for your fund, and you
For a super fund, considering ESG issues when selecting and owning an investment asset means looking at how the company or asset deals with a variety of environmental issues (such as pollution, climate change, water or other resource scarcity), social issues (such as involvement in local communities, their employees, health and safety), and corporate governance issues (such as business ethics, strong boards and appropriate executive pay).
Large investors review these issues because they represent key non-financial risks that can affect the future performance of an investment asset.
Responsible investment involves managing these risks in different ways, including avoiding affected companies, selecting the best or most sustainable companies, and buying shares and then talking to the board as a part-owner.
Many super funds take ESG issues into consideration when selecting assets for the super fund’s overall investment portfolio, but some fund members want to go further and ensure none of the assets in the investment option they select are involved in unethical activities.
Ethical or responsible investing, however, means different things to different people. For some, the key issues are ‘clean and green’ concerns about fossil fuels or uranium, but for others, gambling or employee safety is important.
There are also super funds that use Biblical values as the basis for their investment, while Sharia funds are based on Islamic principles and exclude investments related to usury (money lending), blood products and alcohol.
In recent years, super fund members have increasingly expressed concerns about where the money in their super account is being invested and in response, some super funds now offer their members ethical or socially responsible investment (SRI) options.
Other super funds have decided to provide fund members with ethical or SRI investment options because there is significant evidence that companies which consider ESG issues have more sustainable businesses in the long-term, so they perform better as an investment.
According to recent data from the Responsible Investment Association of Australia (RIAA), ‘core’ responsibly invested Australian share funds and balanced multi-sector funds have performed better than their equivalent mainstream funds over periods of 3, 5 and 10 years (for more information, see RIAA media release at this external link).
If you’re interested in having your super savings invested according to ethical or SRI considerations, set out below are four things to consider.
1. Decide which issues are important to you
What activities must the super fund consider when selecting assets for its investment option? For example, does gambling, logging or animal cruelty matter to you?
2. Check if your super fund offers an ethical or responsible investment option
Ensure you read all the information provided by your super fund about the particular business and/or investment activities which are considered during the research and analysis process prior to selecting assets for the investment option.
3. Decide if you want a broad, or a specific investment style responsible investment option
Within their responsible investment options, some super funds offer fund members a further choice of specific asset class or specific investment style, such as Ethical High Growth, Ethical Balanced or Australian Shares Socially Responsible Investment option.
For more information about investment options, see the following SuperGuide articles
- Understanding the dynamics on which your super fund invests
- Does your super fund disclose what you are investing in?
- Super investing: Should you change your investment option?
- Super investing: What is your risk profile?
- How to choose an investment option for your pension
4. Switch your super account to the new option
Once you have decided which responsible investment option matches your values, you have the option of switching investment options associated with your super account. For more information about switching your investment option, see SuperGuide article Super control: How to switch your super account’s investment option.
Important: There is no standard way super funds select the assets they include in their responsible or ethical investment option. Super funds use different approaches and criteria, so if you are interested in this area, you will need to read carefully the information provided in the member investment guide or on your super fund’s website.
Search the Responsible Returns web tool
The RIAA’s online search tool (responsiblereturns.com.au) helps you find, compare and choose responsible and ethical superannuation and investment products and financial advisers. For specific investment options available within super funds, choose ‘Superannuation or KiwiSaver product’. The tool uses data from the RIAA’s Responsible Investment Certification Program, which compiles detailed information on how the investment option or financial adviser takes into account responsible investment issues during the investment process.
How do you find out what your super fund invests in?
Under the current regulations, super funds do not need to provide a detailed list of their assets, let alone an explanation of how these relate to specific ESG concerns. As a result, finding out which companies and investment assets your super fund owns so you know your super account is not supporting activities that don’t match your values is not easy.
From January 2019 (or perhaps from January 2020, subject to legislation), super funds will be required to provide a detailed list of the assets held in their investment portfolios, but the disclosure rules have been delayed several times already and may not come into effect at that time. For more information about the new portfolio holdings disclosure (PHD) requirements, see SuperGuide article Does your super fund disclose what you are investing in?
One way to get an insight into what super funds are doing is to check the RIAA certification program (for more information, see this RIAA link. The certification program audits the asset holdings and management processes used by super funds and investment managers to ensure they are doing what they claim in their ESG marketing materials.