How to make your super more socially aware

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Increasing awareness of the risks of climate change and increasing frustration with the lack of action by governments, means more Australians are looking to environmental, social and governance (ESG) investment choices to effect change.

A recent study for the Australian Conservation Foundation found that 67 per cent of Australian voters think the Morrison government should pay more attention to expert advice on climate change, with 71 per cent saying they do not see coal and gas as part of Australia’s future energy mix.

Increasingly responsible

These views are seeing investors put their money where their mouths/beliefs are, with many moving their super and other investments away from funds that actively invest in coal, for example. And the investment industry is responding.  

In fact, of the total $3.199 trillion professionally managed investment market in Australia in 2020, $1.281 trillion is responsibly managed, according to the Responsible Investment Association’s 2021 Australia Benchmark Report. That represents 40% of total professionally managed assets, up from 35% of total assets in 2018.

Ethical and effective

Performance numbers for responsible investment funds are also strong. As you can see in the table below, responsible investment funds have outperformed market benchmarks in some categories and matched the market in others over periods of one to ten years.

Performance of responsible investment funds and mainstream funds

Average, net of fees over 10 years

*Data provided by survey respondents

**Data provided by Morningstar Direct^TM

Note: Average performance of responsible investment funds was determined using the asset-weight returns (net of fees) reported by survey respondents over one-, three-, five- and ten-year time horizons and compared to the mainstream fund performance from Morningstar Direct^TM.

Source: Responsible Investment Benchmark Report 2021

How is responsible investment defined?

Responsible investing covers a wide variety of definitions, approaches and strategies. At its core, it is about trying to minimise harm through investing or delivering some kind of social benefit aside from the benefit to the investor.

The Responsible Investment Association Australasia (RIAA) breaks it down into a responsible investment spectrum with seven essential categories.

1. ESG Integration: Consideration of ESG factors as part of investment decisions
2. Corporate Engagement/Shareholder Action: Using shareholder power to influence corporate behaviour
3. Negative Screening: Industry sectors or companies excluded/divested to avoid risk and better align with values
4. Norms-based Screening: Screening out investments that do not meet minimum standards including investments that meet defined ESG
5. Positive/Best-in-class Screening: Investments that target companies or industries with better ESG performance
6. Sustainability-themed Investment: Investments that specifically target sustainability themes, for example, clean energy and green property
7. Impact Investing and Community Investing: Investments that target positive social and environmental impact and provide either a market or below market rate.

Source: RIAA

Responsible investing is becoming more and more mainstream. The RIAA research found investment managers are now less concerned about the performance of responsible investment – 27% were concerned about this in 2020 – than they were in 2019 (35%).

In another sign that responsible investing has gone mainstream, demand from institutional investors was cited as the main motivator for responsible investment in Australia at 40%. There is also growing acceptance that ESG factors impact the financial performance of investments. This was ranked as the third top motivator in 2020 at 27%.

Australian funds at the forefront

Some of Australia’s super funds have been at the forefront of introducing an ESG integration type approach to all of their investment portfolios.

For example, in 2012 First State Super announced it would no longer invest in companies involved in the manufacture of tobacco or cigarettes. Other big super funds followed and 15 (including the largest super fund by funds under management – AustralianSuper) have signed the United Nations Tobacco Free finance pledge.

In its Responsible Investment Super Study 2021, RIAA found that 55% of super funds considered responsible investment in their strategic asset allocation in 2020, up from 39% in 2019. And one-quarter of super funds are demonstrating leading practice responsible investment with these funds now holding 42% of total assets, compared with 28% in 2019.

So even if you don’t select the ESG investment option in your super – and many funds do have that option – your super fund may still be utilising a socially aware approach to investing. Typically, that means eschewing all investments in tobacco, and potentially other ‘non-ethical’ sectors, across the board.

Is your super adopting responsible investing?

An indicator of whether your super fund is adopting such an approach is if they are a signatory to the United Nations Principles for Responsible Investing (UNPRI). Approximately 21 Australian super funds have already signed up to the six UNPRI principles listed below.

1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.

Source: www.unpri.org

You can search for your super fund on the directory of UNPRI signatories here.

Another helpful indicator of your super fund’s commitment to responsible investing is whether it is a member of the Australian Council of Superannuation Investors (ACSI). ACSI members often collaborate to engage with companies to improve ESG practices. ACSI lists its member funds here.

Information on whether or not your super fund is a signatory to the UNPRI or a member of ACSI, along with your fund’s general approach to socially aware investing, is also available in your fund’s annual report.

Socially aware SMSFs

But what do you do if you have a self-managed super fund (SMSF)? How can you take a socially aware approach to investing if you are doing it yourself while, of course, still striving for the best retirement outcomes for members?

Many SMSF members have chosen the DIY route because they like investing and want to invest directly in shares and other assets. They may use managed funds for areas difficult to research comprehensively – like international shares – but do not generally have the majority of their assets in managed funds.

While investing in an ESG or SRI managed fund may not be as attractive to a typical SMSF investor, there are many options available for SMSFs who do choose this route. Arguably an ethical fund may be the least time-consuming approach to socially aware investing for the SMSF trustee.

With hundreds of ethical managed funds available, the RIAA has a useful tool to help you select a fund that aligns with your values and concerns here. The tool allows you to select issues you are passionate about and want to support, and industries you want to exclude, for example gambling and human rights abuses.

There are also more than a dozen ethical or sustainable exchange traded funds (ETFs) on the Australian Securities Exchange (ASX) and the number is increasing rapidly. As you can see in the list below,  which is in no particular order and by no means exhaustive, there are a variety of approaches and sectors on offer.

ESG or sustainable ETFs

• BetaShares Ethical Diversified High Growth ETF
• Vanguard Ethically Conscious Australian Shares ETF
• Vanguard Ethically Conscious International Shares Index ETF
• Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF
• BetaShares Ethical Diversified Balanced ETF
• BetaShares Ethical Diversified Growth ETF
• BetaShares Diversified All Growth ETF
• VanEck MSCI International Sustainable Equity ETF
• VanEck MSCI Australian Sustainable Equity ETF
• SPDR S&P/ASX 200 ESG ETF
• iShares Core MSCI Australia ESG Leaders ETF
• ETFS Hydrogen ETF 

Alternatively, SMSF trustees could examine the annual reports of the companies (and other security providers) they invest in directly, to determine their ESG and SRI credentials.

If that sounds daunting, you might also look for a financial adviser who specialises in ethical investments. Many of them belong to a group called The Ethical Advisers’ Co-op that has a list of members on its website.

Impact investment

What might be well suited for the SMSF investor looking to create a socially aware portfolio, is adding an impact investment option to the mix. It could have the potential to ‘offset’ some of the potential harm caused by a traditional investment portfolio through providing a positive social outcome. Many impact investment options have quite small overall investment capacities and are open to sophisticated investors, like SMSF trustees, with sums of $50,000 to $100,000 to invest.

SMSF trustees focussed on climate change, and the carbon emissions of their portfolio, also have the option of buying tradable carbon offsets if they wish to offset the greenhouse gas emissions elsewhere in their portfolio. They would just need to buy them from an unrelated third party.