The Australian Treasury Department has opened industry consultation on draft legislation, until August 16, on how faith-based superannuation investment products are tested under changes to the Your Future Your Super (YFYS) performance test.
It proposes allowing faith-based funds to pass a supplementary performance test if they fail the usual annual performance test, a move which has drawn criticism from responsible investors.
Responsible Investors Association of Australia (RIAA) chief executive Simon O’Connor said performance testing was important but the current regime penalised products with screens in place, faith-based or not, which strayed from a benchmark.
The prescriptive nature of the performance test had been acknowledged, with the draft legislation, as causing adverse outcomes for impact investing and climate-aligned investing because of their measurement against a benchmark.
“Ultimately, whether faith-based or not, we are quite aware of negative screening in place that necessarily means their alignment to the benchmark is not going to be very strong,’’ he said.
“There are lots of Australians keen to align investments with their values … vegan, Christian, fossil fuel free funds, so it’s important that we don’t have regulations that are thwarting this.’’
The new government made an election commitment to allow the Australian Prudential Regulation Authority (APRA) to consider the religious affiliation of a super fund when applying the annual performance test and is seeking stakeholder views on exposure draft legislation to adjust how these products are treated under the annual performance test.
The legislation seeks to require trustees to apply to APRA for faith‑based product status, subject faith‑based products to a supplementary test that considers their faith‑based investment strategy if they fail the original test and exempt faith‑based products from the consequences of failure if they pass the supplementary test.
Adverse outcomes
Access to Australian faith-based super funds has fallen in the past year as two faith-based products failed APRA’s performance test.
Australian Catholic Super’s LifetimeOne product and Christian Super’s My Ethical Super were named in the lowest 13 performers in Australia with both funds merging with secular funds as a result – Australian Catholic Super has plans to merge with UniSuper while Christian Super announced in April it would merge with Australian Ethical Super.
Christian-based investment funds screen out investment in companies not aligned to Christian values such as those receiving more than a small amount of revenue from alcohol, cannabis, fossil fuels, gambling, weapons, tobacco and adult entertainment.
These investments also avoid companies involved in producing abortifacients and contraceptives, stem cell research and destruction of human embryos.
Meanwhile Islamic-friendly investments align with Halal principles which mean interest-bearing companies violate Shariah principles. Haven Wealth Partners’ Ethical Absolute Return Fund, which is Sharia accredited, excludes companies engaging in unnecessary harm to animals, restrict human rights, operating detention centres, discriminating against Indigenous people, operating in occupied or disputed territories, producing pork products, alcohol, pornography, nuclear power, fossil fuels, armaments, tobacco or companies with more than 33 per cent debt to equity ratios.
Haven Wealth Partners managing director Nick Heuzenroeder said his firm built bespoke high conviction and ethical managed funds for super funds for a competitive fee which included a Sharia-compliant fund invested in Australian equities, property and fixed income.
While the draft legislation would work in principle, he asked why carving out a faith-based treatment could not extend to other ethical investment products.
“I firmly believe that these tests are essential because for too long people have been taken advantage of and they’ve been in a poor performing fund with high fees,’’ Mr Heuzenroeder said.
“But I’m not sure you have to carve out (the test) for one area because they’re right.’’
He said encouraging funds to perform to a benchmark produced “37 flavours of vanilla which was not to anyone’s advantage”.
