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When the world’s largest fund manager plans to dump shares of companies that produce thermal coal, you get the sense that we are at or near a tipping point in the shift to sustainable investing.
In his annual letter to clients, BlackRock CEO Larry Fink said companies that generate more than 25% of revenues from thermal coal will be removed from active investment portfolios by mid-2020.
And in a separate annual letter to CEOs, Fink argues that climate risk is investment risk, and that a failure to adjust investment decisions sooner rather than later will have a negative impact on returns.
“Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
With $10 trillion in funds globally, mostly in passive index funds, BlackRock has clearly made a hard-nosed business decision to embrace sustainability. And as a recent survey of Australian superannuation funds demonstrates, sustainable investing can also pay off financially.
Going green pays dividends
When it comes to any investment strategy, no matter how worthy, the bottom line for super fund members is that it must provide the returns they need to fund their desired retirement lifestyle.
One of the key findings of the Responsible Investment Association Australasia’s Responsible Investing Super Study 2019 was that super funds with sustainable investing strategies across their entire fund outperform their peers over five, three and one-year timeframes. This effect was even more pronounced for their top-rated funds for all round sustainable performance (for a list of leading funds see below).
The RIAA surveyed Australia’s 50 largest super funds plus some that opted in, representing $1.75 trillion in assets under management and 92% of all APRA-regulated super funds.
Given the variety of approaches to sustainability, in order to compare apples with apples the study compared MySuper products that incorporate sustainable investing with those that don’t.
Financial Performance of MySuper for financial years to 30 June 2019
| Responsible Investment super funds v non-RI super funds returns | |||
|---|---|---|---|
| 1-year average | 3-year average | 5-year average | |
| Non-RI (20 funds) | 7.31% | 8.65% | 7.7% |
| RI (34 funds) | 7.33% | 9.06% | 8.14% |
| Benchmark average (54 funds) | 7.32% | 8.90% | 7.98% |
| RI Super Study 2019 leader board v non-leaders | |||
| Non-leaders (41 funds) | 7.07% | 8.62% | 7.74% |
| RI Super Study leaders (13 funds) | 8.11% | 9.81% | 8.71% |
| Benchmark average (54 funds) | 7.32% | 8.9% | 7.98% |
Source: RIAA
Sustainable investing gaining momentum
While climate change is front of mind for many Australians during a summer of catastrophic bushfires, it is just one of many environmental, social and governance (ESG) issues driving a growing investor demand for sustainable investments.
To gain some insight into the evolution of what it calls responsible investing (more commonly referred to as sustainable or ethical investing), the RIAA charted its growth in the superannuation sector between July 2016 and June 2019.
The survey found that 81% of funds have some form of responsible investing in place, up 11% since 2016. While many funds these days have a sustainable investment option, a growing number integrate ESG factors on a fund-wide basis. More than 70% integrate ESG factors into their financial analysis of investments, up 17% in a year, while nine funds consider ESG and/or climate risk at each board meeting and others do so annually.
Sustainable buying covers a variety of strategies, from negative screening to exclude companies that do harm to sustainability-themed investments and impact investing that actively target companies or industries doing good.
Case study: Impact investing
Christian Super’s impact investing portfolio represents 10% of fund assets. Its focus is on renewable energy, sustainability, empowering livelihoods, alleviation of disadvantage in Australia, financial inclusion, education, spiritual impact and healthcare.
Source: RIAA
The survey found that 61% of super funds have at least one negative screen across their entire fund, up from 34% in 2016. The most popular fund-wide exclusions are tobacco, armaments and fossil fuels in that order.
More than half of all funds now have at least one employee responsible for sustainable investing, up four-fold since 2016, while others outsource the function.
Calls to prepare for ‘green swans’
It’s one thing for super funds or big investment managers such as BlackRock to say they will exclude certain companies from their investment offerings, but increasingly investors, regulators and the community are demanding more.
The 2008 global financial crisis was referred to as a ‘black swan’ – a rare and unexpected event with wide-ranging effects. The Bank for International Settlements, which acts as central bank to the world’s central banks, recently warned their members to start preparing for ‘green swan’ events that would force them to rescue the financial system from the impact of climate change. For example, the Reserve Bank of Australia (RBA) may have to buy up distressed or stranded assets such as coal mines to save the economy from climate change-induced financial crisis.
In a recent downgrade of the global economic outlook, the International Monetary Fund also warned that climate change was a growing financial risk.
In Australia, the Government’s 2018 Productivity Commission report on superannuation included better disclosure of sustainable investment performance among its final recommendations.
The Reserve Bank, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have also called on government, business and superannuation trustees to act on climate change, warning that failure to act now will come at a cost due to extreme weather events.
Super funds that walk the talk
In order to see which super funds are walking the talk, the RIAA study assessed funds not just on their commitment to responsible investing but also implementation, governance and accountability, transparency and measured outcomes.
Case study: Setting targets
Cbus was one of those setting targets at an asset allocation level. It has a target of zero net emissions by 2030 for its property and infrastructure investments, plus a 1% investment allocation to climate solutions. Australian Ethical targets zero portfolio emissions by 2050.
Source: RIAA
Based on their overall assessment, the RIAA study provided a leader board of super funds currently doing the most to walk the talk on sustainability. These funds are listed in alphabetical order in the table below.
Responsible investing super study leader board
| Fund name | Fund type |
|---|---|
| Australian Ethical | Retail |
| AustralianSuper | Industry |
| CareSuper | Industry |
| Cbus | Industry |
| Christian Super | Industry |
| First State Super | Public sector |
| Future Super | Retail |
| HESTA | Industry |
| Local Government Super | Public |
| UniSuper | Industry |
| VicSuper | Public sector |
| Vision Super | Public sector |
Source: RIAA