3 questions to ask when choosing a responsible investment option

In the investment world, responsible investment (RI) is a process that takes into account environmental, social, governance (ESG) and ethical issues during the investment process. Traditionally, super funds only considered financial issues like future performance when they selected an investment asset.

With an RI approach, a super fund considers ESG and ethical issues before – or together with – the usual research and financial analysis they undertake 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 that 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.

What ESG investing means for you and your super fund

For a super fund, considering ESG issues when selecting and owning an investment asset means looking at how the company or investment asset deals with:

• 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)
• 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.

Why are super funds offering RI and ethical investment options?

Many super funds take ESG issues into consideration when selecting assets for the super fund’s overall investment portfolio to enhance the long-term investment performance of the fund and limit its non-financial risks.

There is significant evidence that companies that consider ESG issues have more sustainable businesses in the long-term, so they perform better as an investment.

According to 2019 data from the Responsible Investment Association of Australia’s (RIAA) Super Study 2019, super funds that comprehensively engage in RI are outperforming their peers over periods of one, three and five years. (For more information, see RIAA media release.)

Some fund members, however, want to go further and ensure none of the assets in their investment option are involved in unethical activities. This has encouraged many super funds to offer ethical or socially responsible investment (SRI) options to their members.

3 things to consider when choosing an ethical or SRI option

If you’re interested in having your super savings invested according to ethical or SRI considerations, you need to ask yourself three key questions:

1. What responsible investment issues are important to me?

What activities must the super fund consider when selecting assets for its investment option? For example, does gambling, logging or animal cruelty matter to me?

2. Does my super fund offer an ethical or RI option?

Although some super funds offer clearly labelled SRI or ethical investment options, other super funds have taken the step of investing all the fund’s assets responsibly. These super funds may not offer a clearly labelled RI investment option.

Before selecting an investment option, ensure you read all the information provided by your super fund about the particular business and/or investment activities it invests in, plus the research and screening process it undertakes prior to selecting assets for the investment option.

3. Do I want a broad or a specific asset class RI 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 about investment options, read SuperGuide articles

• Super investing for beginners
• Does your super fund disclose what you are investing in?
• Is it time to change your super investment option?
• How to grow your super: Know your risk profile
• How to choose an investment option for your pension

Switching your super account to a new investment option

Once you have decided which responsible investment option matches your values, you can consider selecting a suitable investment option offered by your super fund. For more about switching investment option, read SuperGuide article How to change your investment option: 6 points to check before you switch.

The RIAA offers an online search tool that can be useful when it comes to finding, comparing and choosing responsible and ethical superannuation and investment products.

The Responsible Returns search tool uses data from the RIAA’s Responsible Investment Certification Program, which compiles detailed information on how the investment option takes into account RI issues during the investment process.

How do you find out what your super fund invests in?

From 31 December 2019, super funds are required to provide on their website a detailed list of the assets held in each of their investment options. For more about portfolio holdings disclosure (PHD), read SuperGuide article Does your super fund disclose what you are investing in?

Another way to get an insight into what super funds are doing is to check the RIAA’s certification program. The 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. (For more information, see RIAA.)