Top performing sustainable super funds (to December 2021)

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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 sustainable, 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 on their website, including their sustainable option if they have one. 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 harm the environment or society, such as fossil fuels, weapons, gambling, alcohol and tobacco, and modern slavery.

In the last two years, 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 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, and not just for the top performing funds.

In an analysis of median returns of Balanced options (60–76% growth assets) over five years to 31 December 2021, SuperRatings found the median return for Sustainable Balanced options was 8.6% per year. This was slightly higher than the median return for comparable Balanced options of 8.5% per year.

But according to SuperRatings executive director Kirby Rappell: “In recent years we have seen a shift, with sustainable balanced options performing competitively relative to standard balanced options.”

The table below shows the Top 10 Sustainable Balanced options vs the Balanced option from the same fund.

Source: SuperRatings

As you can see, the Sustainable Balanced option outperformed the Balanced option for seven of the top 10 funds. A further fund – Australian Ethical – does not have a standard balanced option so the return for its 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 11.7% per year. This was 1.4% higher than the highest balanced option return in the top 10 table above and 2.3% above its own Balanced Growth option.

Indeed, HESTA was the top performing sustainable option over five, seven, 10 and 15 years. But Hostplus Socially Responsible Investment Balanced took out the number one spot over the 12 months to 31 December 2021 while Raiz Super Emerald (SRI) was the best performer over three years.

HESTA’s Sustainable Growth option, previously called its Eco Pool option, has been around since February 2000. 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 10.7%. As well as excluding fossil fuels, tobacco, gambling and weapons, UniSuper’s sustainable option positively screens for ESG management and risks. UniSuper is one of a growing number of super funds that actively engage with companies using voting rights to influence and drive change.

Looking ahead

The returns listed above are net of fees and taxes. One factor in improving relative performance of sustainable options may be attributed to fees.

Historically, fees for sustainable options have been higher than those for standard balanced options. However, in recent years there has been downward pressure on fees.

While sustainable funds have been performing well, past performance is no guide to the future. SuperRatings market insights manager Camille Schmidt suggests new investors take a cautious approach following steep falls in global technology stocks in early 2022.

“We note that one of the drivers of strong performance among the top sustainable balanced options has been clean technology investments.

“We expect it to be a rockier year ahead, particularly for growth and technology stocks which sustainable options may have significant exposure to. So it’s best to discuss your investment option selection with your fund, or an adviser you trust, before making any changes to your retirement nest egg.”