Can you exclude fossil fuels from your superannuation?

Despite warnings from scientists that we need to transition out of fossil fuels urgently, the move to renewable energy sources is occurring slowly.

For people concerned about this issue, switching to a clean superannuation portfolio might be a personal priority and can be a way to make a statement.

It can also be an investment strategy – groups such as Industry Super Australia recognise that a large-scale transition to renewables will produce significant investment opportunities. 

But there are only a handful of funds that don’t invest in fossil fuels at all. Future Super bills itself as Australia’s first fossil fuel-free super fund. Future Super is also the investment manager for Verve Super (which is marketed specifically to women) and Cruelty Free Super (which advertises its vegan-friendly credentials), both of which also avoid fossil fuels.

Making the move to renewable energy

Some super funds offer individual options that rule out any investment in fossil fuels (see tables below).

Australian Ethical says it has “zero investments” in fossil fuel companies, but, like many super funds, it invests in diversified companies that make some revenue from these fuels. 

Completely extracting yourself from fossil fuels is made difficult by the fact that many of the major renewables players are old fossil fuel companies diversifying with new revenue streams. This would make them off-limits for anyone wanting to totally exclude fossil fuel activity from their super.

While the renewable energy sector in Australia is growing, few companies have reached an investable scale. 

“We’re keen to encourage more renewable companies to list [on the stock exchange],” says Max Cunningham, executive general manager, Issuer Services and Investment Products at the Australian Stock Exchange. “At the moment, renewables are a pretty small part of our market.” 

Our table shows the fossil fuel-free super options and their long-term performance. 

But the performance figures are only a guide because funds report their returns in slightly different ways – some have fees taken out, others don’t – and unfortunately this is something regulators are yet to crack down on, making comparison difficult.

Long-term performance of fossil fuel-free super

Investment option: International shares

Super fund	Fossil-free option	3-year performance	5-year performance	10-year performance
UniSuper	Global Environmental Opportunities	14.08%	10.94%	N/A
Median for this type of option		12.83%	10.29%	10.74%

Investment option: High growth

Super fund	Fossil-free option	3-year performance	5-year performance	10-year performance
UniSuper	Sustainable High Growth	14.08%	11.07%	9.93%
Median for this type of option		11.15%	9.37%	9.21%

Investment option: Growth

Super fund	Fossil-free option	3-year performance	5-year performance	10-year performance
Cruelty Free	Growth	6.65%	6.74%	N/A
Future Super	Renewables Plus Growth	N/A	N/A	N/A
Median for this type of option		10.48%	8.45%	8.54%

Investment option: Balanced

Super fund	Fossil-free option	3-year performance	5-year performance	10-year performance
Future Super	Balanced Impact	8.59%	7.18%	N/A
Future Super	Balanced Index	N/A	N/A	N/A
UniSuper	Sustainable Balanced	11.34%	9.02%	8.73%
Verve Super	Balanced	N/A	N/A	N/A
WA Super	Sustainable Future	10.44%	8.62%	7.07%
Median for this type of option		9.09%	7.66%	7.91%

Source: SuperRatings

Note: Net returns (crediting rates) to November 2019. The numbers in bold show an option that has outperformed the median for that type of option.

What fees will I pay for a clean energy super portfolio?

Going fossil fuel-free with your super doesn’t necessarily come cheap. 

Future Super’s Renewables Plus Growth currently has higher fees than any MySuper product. 

However, most Future Super members have chosen the Renewables Plus Growth or Balanced Impact plan, despite their higher fees.

 “85% of our members have chosen to prioritise having a bigger impact with their investment instead,” says Future Super founder Adam Verwey.

The fund says it’s been lowering its fees as it grows.

Fees for fossil-free super options

Super fund	Investment option	Disclosed fees
UniSuper	Sustainable Balanced	$281
UniSuper	Sustainable High Growth	$306
UniSuper	Global Environmental Opportunities	$336
WA Super	Sustainable Future	$518
Future Super	Balanced Index	$584
Verve Super	Balanced	$689
Future Super	Renewables Plus Growth	$959
Future Super	Balanced Impact	$964
Cruelty Free	Growth	$997

Source: SuperRatings

Note: The annual fees below are based on a $50,000 balance. For comparison, the median fees for a single strategy MySuper fund is $561.

It’s easy to overlook fees, but their impact across a lifetime of savings is massive. The Productivity Commission found a fee increase of 0.5 percentage points would knock $100,000 off the retirement balance of a typical worker. It also discovered that higher fees are associated with lower net returns.

Does my super fund actively invest in renewable energy?

Divesting from fossil fuels is one thing, but are those funds investing in renewables instead? 

Future Super’s ‘Renewables Plus Growth’ has the most ambitious renewables target of its options, aiming for 20% of its portfolio. Verwey says the fund has achieved this target previously and is currently just beneath this mark.

Funds across the spectrum are increasingly taking up sustainability-themed investments, including renewable energy. 

The Responsible Investment Association Australasia found that the use of this type of investing as a primary strategy doubled between 2018 and 2019.

Many super funds have also started excluding fossil fuel companies to some extent, but how they do this varies widely. 

Some exclude particularly emissions-heavy sectors of the industry, such as thermal coal. Others rule out companies that derive a ‘material’ amount of their revenue from fossil fuel, though what percentage they consider material (and how this is calculated) differs from fund to fund. Yet other funds use a more subjective analysis of what they consider ‘material’.

The means that comparing different fossil fuel exclusions between super funds is complex. 

Is the ‘middle ground’ approach of excluding some fossil fuels worthwhile?

Some super funds only partially exclude non-renewable energy on the grounds that remaining a shareholder allows them to drive change from within. It’s hard to know if this approach is working. So far, supporters of an engagement approach point to increased transparency as among its main wins. 

But Chris Riedy, professor of sustainability governance at the Institute for Sustainable Futures, University of Technology Sydney, says such revenue-based exclusions are “a bit of a cop-out”.

“If you’re serious about filtering out companies that produce fossil fuels, you should cut them all out,” he says.

Jeremy Moss, a professor at the University of New South Wales Practical Justice Initiative, says sector-based exclusions are “weak and pathetic” and “a hopeless response to a crisis”.

On the other hand, the Australian Council of Superannuation Investors (ACSI), which advises super funds on how to engage with companies as shareholders, thinks there’s a case for continuing to invest in, and engage with, fossil fuel producers. 

ACSI has argued that the transition to a renewables-based energy supply will take time. In the meantime, it believes responsible ownership of fossil fuels is preferable to disengaged investors owning these assets. It concedes that achieving change through engagement is difficult, but says that super funds can make “useful contributions”. 

In making a decision on whether to cut fossil fuels from your super, it’s worth considering the limitations. One major roadblock to achieving change through divestment is the fact that much of the world’s fossil fuel reserves are owned by companies not listed on a stock exchange. Where there are no shares issued by a company, shareholder action has no leverage. 

What to weigh up if you’re thinking of switching to fossil fuel-free super

• Do you want to exclude fossil fuels completely or just cut out the worst offenders? Read the fine print to make sure the fund’s exclusion is what you think it is. 
• Bear in mind that fossil fuel-free super is a recent development. While some of these options have performed well so far, you may want to wait to ensure this continues. The advice from experts is to choose super with strong lo ng-term performance. 
• Remember that fees for fossil-free super can be higher than default super and that fees have a major impact on your retirement savings.

This article was originally published on the Choice website and has been published here with permission.