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Sustainable investment options have been on the menus of large superannuation funds for over 20 years, but they have become much more widely available over the last three to five years.
This coincides with greater awareness of the impact of businesses on the environment and society, and younger members in particular seeking to align their values with their investments.
These days, most large funds have a sustainable option. Depending on the fund, these options go by various labels such as ethical, responsible, socially aware, socially conscious and socially responsible.
In addition, they may be labelled Balanced, Growth or Balanced Growth depending on the level of growth assets in the underlying investment portfolio.
To work out what a sustainable option is investing in, or to compare sustainable options, you need to look beneath the labels. Funds outline their investment approach for each investment option, including their sustainable option if they have one, on their website; some also include a list of all their underlying investments.
Sustainable investment approaches are evolving
The most common approach when building sustainable options is to apply a negative screen to existing fund portfolios. Negative screens exclude companies with activities that can have a negative impact on the environment or society, such as fossil fuels, weapons, gambling, alcohol and tobacco and modern slavery.
In the last 18 months, as awareness and concern about climate change increased, a string of industry super funds announced net zero emissions targets and plans to exit investments in thermal coal companies.
But there is also growing interest in screening for companies making a positive impact on the planet and society. Super funds are also taking a more active role by engaging with companies and using their shareholder voting rights to promote environmental, social and governance (ESG) issues.
While the increasing availability and diversity of sustainable investment options has removed one roadblock for people who want to align their investments with their values, historically returns and fees have also been an issue for more pragmatic investors.
For example, the Vanguard/Investment Trends 2021 SMSF Investor Report found 48% of SMSFs would only consider ESG investing if returns are better than other investments. A further 19% avoid companies that do harm, 25% prefer to invest in companies that do good and 9% cited responsible investing as their top priority.
Sustainable returns are closing gap
In the past, returns from sustainable investment options tended to lag the standard balanced option but there is evidence that this is changing, at least for the top performing funds.
In an analysis of median returns of Balanced options (60–76% growth assets) over five years to 30 June 2021, SuperRatings found the median return for Sustainable Balanced options was 8.3% per year. This was slightly lower than the median return for comparable Balanced options of 8.7% per year.
But according to SuperRatings executive director Kirby Rappell: “In more recent times, (sustainable) options have performed well with the top performing options surpassing their typical balanced-style counterparts in some cases.”
The table below shows the Top 10 Sustainable Balanced options vs the Balanced option from the same fund.
As you can see, the Sustainable Balanced option outperformed the Balanced option for five of the top 10 funds. A further two funds – Australian Ethical and Active Super do not have a standard balanced option so the return for their sustainable option is displayed twice.
HESTA’s Sustainable Growth option provided the best return to members over five years for a dedicated sustainable option, with a return of 11.8% per year. This was 1.2% more than the highest balanced option return over the same period and 2.4% above its own Balanced Growth option.
HESTA’s Sustainable Growth option, previously called its Eco Pool option, has been around since February 2000. In the year to June 2021, it was the top performing sustainable option over 1, 3, 5, 7, 10 and 15 years. As well as excluding companies that invest in fossil fuels, uranium, tobacco and controversial weapons, it invests in companies with above average ESG performance, sustainable properties and sustainable solutions.
Second place went to UniSuper’s Sustainable Balanced option with a return of 10.2%. As well as excluding fossil fuels, tobacco, gambling and weapons, UniSuper’s sustainable options positively screens for ESG management and risks. UniSuper is one of a growing number of super funds that actively engage with companies use voting rights to influence and drive change.
Third-placed VicSuper’s Socially Conscious option with a return of 9.8% per year also has an ESG integration approach with voting and management engagement.
… while fees are falling
The returns listed above are net of fees and taxes. One factor in the improving relative performance of sustainable options may be attributed to fees.
Historically, fees for sustainable options have been higher than fees for standard balanced options. However, in recent years there has been downward pressure on fees.
SuperRatings market insights manager Camille Schmidt says 50% of the top 10 sustainable balanced options have lower annual fees for their sustainable option than their standard balanced option on a $50,000 account balance.
“Typically, differences in fees will be driven by the differences in the underlying investments and the associated fees, as funds’ administration fee pressures are based on factors unrelated to whether the member was invested in an EST option or not,” she says.