OPINION | There has been a groundswell of support from Australians for ethical investing, and super funds can no longer ignore the pressure to align their investment approach with their members’ attitudes.
Many super funds have already heeded the call of their members and have sophisticated, responsible investment strategies in place.
It’s impressive that more than half of all professionally managed assets in Australia now operate under responsible investment strategies. This is a good start but many other super funds have a long way to go.
Australian Ethical recently received the highest possible ranking in the Responsible Investment Association Australasia’s (RIAA) first benchmarking report on the top 50 super funds. It was one of just three retail funds to do so, and one of 12 funds overall.
The RIAA graded funds as either limited, basic, broad or comprehensive in terms of their usage of responsible investment. To receive the highest accolade, the 12 funds had to rank as comprehensive across five pillars: commitment; governance; implementation; measurement; and transparency.
We’re not just singing our own praises by calling out the importance of this award. We fundamentally believe benchmarking surveys have an important role to play in making the ethical superannuation industry more transparent.
This is important to allow investors to make informed choices, to hold super funds accountable and to share industry-leading practice amongst funds.
Allow investors to make informed choices
Benchmarking surveys create a transparent environment, where investors have an objective measure by which to assess how ethical their super fund is. This is increasingly important in a climate where the growing support behind ethical investment isn’t just hearsay, it’s a fact.
Over the past year, there has been a 62 per cent growth in core responsible investment lending in Australia, bringing it to $51.5 billion. Moreover, there are more than 6 million Australians who identify as ethically active, and for these Australians, ethical investment is increasingly a priority.
Transparency is crucial for helping such investors pick a super fund that aligns with their values.
Benchmarks hold funds accountable
With more than $1.7 trillion invested in superannuation in Australia, super funds are in a powerful position to support positive social and environmental outcomes that align with the values and expectations of their members.
It’s all too easy for funds to fly under the radar and assume members won’t delve deep enough into the technicalities of their super to understand where it’s invested.
Having a simple benchmarking tool that helps do the research on behalf of investors will empower more Australians to make better choices about their funds. In turn, funds will feel more pressure to upgrade their ethical practices to prevent member defection.
One benchmark for best practice
More than two-thirds of the largest super funds in Australia have now embedded a commitment to responsible investment, highlighting the growing importance of implementing an ethical investment framework. However, different funds use different tools, including: positive/negative screening; integration of environment, social and governance (ESG) considerations; impact investment; corporate engagement; voting sustainability-themed allocation.
The RIAA’s benchmarking survey can highlight best practice in the industry and super funds will be able to learn from each other.
Australian Ethical is the first fund to set a target for our investment portfolio of zero emissions by 2050, and we are already disclosing the emissions intensity of our portfolios, starting with our equities holdings and moving to other asset classes in the future.
We encourage other funds to move towards zero emissions and hope that as super funds deepen and refine their responsible investment strategies, they will consider this approach.
What the future holds
It seems clear that ethical investment practices will become the new normal.
We have busted the myth that investing ethically comes at the cost of good returns. Our Australian Shares Option has returned 8.7 per cent for the past 10 years, beating its benchmark by 9 per cent.
Recent performance has been particularly impressive, returning an average of 12.9 per cent a year over the three years to June 2016.
The next challenge for those passionate about ethical investment is to encourage an even more widespread adoption of responsible investment principals and to empower members with an array of choice when it comes to ethical investing.
Phil Vernon is the chief executive of Australian Ethical, a $98 million ASX-listed retail superannuation and managed funds manager with $1.7 billion in funds under management.