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Although you might want your super fund to be a top performer, for many fund members it’s also increasingly important that their money is invested responsibly and in line with their personal values.
Importantly, investing with a conscience no longer means sacrificing returns (see Why are super funds using RI approaches below).
According to the Responsible Investment Super Study 2021 by the Responsible Investment Association Australasia (RIAA), awareness of, and demand for, responsible and ethical investments is growing strongly and is now a mainstream issue. The study found the proportion of Aussies with responsible investments has hit 17%, driven largely by Gen Xers and Millennials. Four out of five people now expect both their super and bank accounts to be invested responsibly and ethically, and 80% also expecting their savings to have a positive impact on the world.
Super funds are responding to this desire, with many now offering members the opportunity to switch their super into a responsible investment (RI) option. If you feel uncomfortable with your retirement savings supporting activities like fossil fuel mining, armaments development or employee exploitation in third-world countries, it might be time to check out these investment options.
How does responsible investing work?
Responsible investing is now playing a significant role in global investment markets. In Australia, the RIAA’s September 2022 Benchmark Report found $1.54 trillion in assets are currently invested using these approaches. This is up from $1.28 trillion in the previous year and represents around 43% of total professionally managed funds.
In the investment world, responsible investing takes into account environmental, social, governance (ESG) and sometimes ethical issues as a part of the investment process. Large investors now recognise these issues can represent key non-financial risks that can affect the future performance of an investment.
Considering these 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)
Major investors attempt to manage these risks in different ways, including avoiding companies doing harm, selecting the best or most sustainable companies, or buying shares and then talking to the board as a part owner.
These risk management strategies represent a shift from past approaches that saw most large investors only considered financial issues when selecting an investment asset.
Why are super funds using RI approaches?
Australian super funds have followed this trend, with the RIAA Super Study noting that the strategic asset allocation of the majority (55%) of local super funds is now influenced by this style of investing.
Super funds are considering RI issues when they select assets for their investment portfolio because there is strong evidence this strategy enhances a fund’s long-term investment performance and reduces the non-financial risks it faces.
There is also significant evidence companies that consider ESG issues have more sustainable businesses in the long term, so they perform better as an investment.
This is reflected in the RIAA’s 2022 Benchmark Report, which found responsible investment products outperformed the overall managed fund market in both the multi-asset and Australian shares categories. It also found the average performance of RIAA certified leaders’ MySuper products outperformed their peers over periods of three, five and seven years.
Choosing a RI investment option
While RI approaches are being used by many super funds at the overall portfolio level, some fund members want to go further and ensure none of the money in their super account is in an investment option involved in unethical activities.
In fact, the RIAA From Values to Riches 2022 Report found 74% of Australians would consider moving to another provider if they found out their current fund was investing in companies engaged in activities not consistent with their values.
To cater to this growing demand, many super funds offer sustainable or responsible investment options to their members. These options have a wide variety of names such as ethical, responsible, socially aware or sustainable.
3 things to consider when choosing a RI or sustainable investment option
If you’re interested in having your super savings invested according to sustainable or RI considerations, you need to ask yourself three questions:
1. What issues are important to me?
Think about the activities or issues that matter to you, as everyone will have a different view.
What activities must your super fund consider when selecting assets for its investment option? For example, does gambling, logging or animal cruelty matter to me?
As different super funds use different criteria in their screening processes, you need to decide your own personal lines in the sand.
2. Does my super fund offer an ethical or RI investment option?
Although some super funds offer clearly labelled sustainable, socially responsible or ethical investment options, other super funds have taken a different path. Instead, they have chosen to invest all the fund’s assets using a RI approach. In this case, your super funds may not offer a clearly labelled RI or sustainable investment option.
If you fund offers a RI option, you should do some homework prior to switching. Ensure you read all the information provided by your super fund about the particular businesses and/or investment activities it invests in, plus the research and screening process it undertakes prior to selecting assets for the investment option. This will help you understand whether it addresses the issues you’re concerned about.
3. Do I want a broad or a specific asset class RI option?
Within their RI or sustainable investment options, some super funds offer 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.
Switching your super account to a new investment option
Once you have decided on an investment option that matches your values, you will need to switch over to that option if it is within your current super fund.
If there is not a suitable investment option in your current super fund, the RIAA offers an online search tool that can be useful when it comes to finding, comparing and choosing responsible and ethical super and investment products.
The Responsible Returns search tool uses data from the RIAA’s Responsible Investment Certification Program, which compiles detailed information on how a super fund investment option (or banking product) takes RI and sustainability issues into account during the investment process.
How do you find out what your super fund invests in?
From 31 December 2021, super funds are required to provide on their website a detailed list of the assets held in each of their investment options. This must be updated twice a year.
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 sustainability and RI marketing materials. For more information, visit the RIAA website.