Superannuation funds need to embed ESG criteria across their investments and not just have an ESG option as part of their product suite, Australian Ethical’s chief executive John McMurdo warns.
In an interview with Investment Magazine, he predicts the ethical investment sector is set to grow dramatically, given the strong demand by Australians to make sure their super funds were invested responsibly.
Superannuation funds need to “look at ESG as a whole of business approach and ensure that their organisations are truly ethical and not just “put an ESG wrapping” on a product and indulge in sloganeering”, he says.
“It’s not enough to provide an ESG (investment) option alongside options which invest in things damaging to the world and people’s lives.”
“I find it extraordinary that some funds have a little ESG option out to the side while their mindset is still about old style investing. Australians want the companies they are invested in to be fair dinkum, otherwise they don’t pass the pub test.”
Underpinned by UN SDGs
Founded in 1986, Australian Ethical is a fund and superannuation manager with $8.68 billion in funds under management, with an investment philosophy based on 23 principles set out in its charter.
The largest and longest standing investment company in Australia officially described itself as ethical, its investment approach, which is in line with the 17 United Nations Sustainable Development Goals, specifically excludes sectors such as fossil fuels, tobacco, nuclear and arms manufacturers.
Its guidelines also include not investing in any companies which are seen as polluting, producing goods which could have a harmful effect on humans, animals and the environment, are involved in land speculation, encourage people into financial overcommitment or exploit people through the payment of low wages or poor working conditions.
The bulk of its funds are the $6.5 billion in Australian Ethical Super which has more than 100,000 members. The group’s total assets have more than doubled over the past two years from $3.28 billion in March 2020.
This follows the move by Christian Super, finalised last December, to transfer some $1.93 billion and 28,000 clients into the group, after being directed by APRA to seek a merger partner.
McMurdo sees the big rise in Australian Ethical’s funds under management in recent years as a sign of increasing interest by Australians in responsible investing.
“It’s a dramatic growth,” he says. “It is all about consumer demands for this style of investing.”
McMurdo welcomes the crackdown by ASIC on greenwashing which has included taking action against US index fund giant Vanguard last year and court action against Mercer Superannuation in March this year.
Greenwashing, he says, undermines the genuine ethical investment sector.
“It’s a massive problem,” he says. “We welcome the fact that the regulators and the authorities are starting to crack down quite hard on it.”
He says greenwashing meant that funds which should be going to truly ethical companies and investments could be diverted into companies which were not really green.
The existence of greenwashing also made Australians wary of investing in responsible products.
“According to the RIAA, 82 per cent of Australians who are considering investing in responsible investment products in the next year are concerned about greenwashing.”
“We need a thriving, ethical finance sector. Greenwashing is holding us back and undermining true authentic providers like us.”
In 2014 Australian Ethical was certified as a B-Corp, part of a global organisation for companies which are deemed to have high social and environmental impacts.
The company has also been ranked by US research and ratings company, Morningstar, as having an ESG Commitment Level of Leader.
But the agency also notes that Australian Ethical’s strict guidelines have excluded it from investing in 50 per cent of the ASX 300 companies and many other major global companies.
McMurdo says it has been able to maintain its high level of ethical investing with strong investment performance.
“Our investment track record is very strong. We have no trouble finding fabulous sectors and fabulous companies to invest in,” he said.
Its investments include sectors such as health care, food preservation and renewable energy.
The Australian share option in its super fund has an 10.6 per cent annual average return over the past decade, ranking number in the SuperRatings Fund Credit Rating Survey as of September last year.
Its super fund balanced option recorded a 7.1 per cent a year return over the 10 years.
“This is not philanthropy,” McMurdo says. “This is smart investing.”
He admits that not investing in some companies such as coal companies which have done well as energy prices rose in the wake of the Russian invasion of Ukraine, could cost it returns in the short term.
“We understand that when there is a short term premium for fossil fuels we may under perform in the very short term,” he says.
“Investing in responsible, future focused companies and sectors which are good for the planet and not in stranded assets in dying sectors will be good over the medium and long term.”
Australian Ethical recently sold out of construction and property development company, Lend Lease, because of its concern over the impact of a proposed housing development at Mt Gilead in south-western Sydney on the habitat of koalas.
The fund had worked for several years with Lend Lease over the issue, but in the end they had been unable to agree on an arrangement to ensure the koala colony in the area would be adequately protected.
“We have worked alongside Lend Lease for four years to try to influence them to come up with a better outcome for the koalas, and not damage the natural habitat,” he said.
“But we ultimately decided that Lend Lease was not going far enough.”
The sale of its shares in Lend Lease has followed moves to sell out of other investments where it sees companies are no longer fitting its ethical criteria.
It sold out of global insurance broker Marsh McLennan in 2020 after it refused to cut ties with the Adani company in connection with its Carmichael coal mine in Queensland.
Other companies it has sold out of include James Hardie Industries, Brickworks and Wagners for not having aggressive enough strategies to lower the carbon intensity of building materials, Harvey Norman, Pacific National, Ventia, Transurban and publishing company Axel Springer.
Its portfolio includes Apple, Coles, Woolworths, Wesfarmers, CSR, Downer EDI, Rubicon Water, electronic real estate settlement platform Pexa, the Macquarie Group and news and entertainment company, HT&E.
While Australian Ethical has done well in the APRA performance tests for MySuper products, Mr McMurdo says he is concerned that the Your Future, Your Super tests could have a negative impact on funds wanting to invest in greener companies.
The Federal Government is now reviewing the performance test as a result of criticism of some unintended consequences of its benchmarking system.
“We are very confident about our ability to keep delivering great, long term performance,” McMurdo said.
“But when anything is tied to an index it has a reinforcing property to it – it encourages people to stick close to an index. In the Australian context, it requires you to invest in fossil fuel companies. It has the negative aspect of reinforcing the past, as opposed to being future focused which is what the world needs.”
But he believes having some benchmark is appropriate for investment managers to be held to accountable to members.
“But care is required about what that test entails and ensuring that it supports the building of a better planet and better lives and doesn’t confine the world to a place which we know is flawed and broken.”