There is a small performance gap in favour of environmental, social and governance (ESG) superannuation funds, according to new research.
More Australians are aligning their superannuation options to sustainable values according to the latest research by Rainmaker Information.
The research published in SelectingSuper reveals that one quarter of Australia’s ESG investment providers are superannuation funds and almost half of superannuation savings are being overseen by funds that follow ESG principles.
Executive director of research at Rainmaker Information, Alex Dunnin says: “The increase in funds invested into ESG related products as well as an increase in the number of super funds following these principles across their whole portfolio highlights that following ESG principles is simply good practice.”
The research reveals that HESTA’s Eco-Pool is the top performing ESG option, with a 10.3 per cent annual return over five-years. Over 10 years the fund returned 10.4 per cent a year.
Australian Ethical Super’s International Shares returned 9.8 per cent a year over five years, and 6.5 per cent a year over 10 years.
UniSuper’s Sustainable High Growth was ranked third in the five-year category, returning 9.7 per cent a year, and ranked second over 10 years, with a return of 10.1 per cent a year.
It was previously assumed that investors had to give up performance to have an ethical fund.
Interestingly some of the balanced ESG superannuation options outperformed other balanced options in the 12 months to April 2019.
Rainmaker found that there was a 0.6 per cent performance gap in favour of ESG options over the one-year period.
Dunnin says: “These results show that investors give up nothing when they invest according to ESG principles, though a fund following ESG principles should never be used as an excuse for under-performance.”
ESG investing takes into account environmental, social and governance issues in the investment process of research, analysis, selection and monitoring of investments.
For fund managers there are many ways to invest. They can use negative or exclusionary screens that remove certain sectors and securities from an investment.
Funds can also implement positive screening, where funds select companies that set positive examples of environmentally friendly products and socially responsible business practices.
This also includes impact investing, which involves investing to make a positive social and environmental impact, as well as ESG integration and analysis.
The largest super funds with ESG options are UniSuper with $3.9 billion assets under management followed by AustralianSuper with $2.3 billion and Christian Super at $1.5 billion.
Dunnin says: “When funds are following ESG principles they are looking at the long-term risks they are exposing to their investors in ways they never thought about before as investors can be in the funds for over thirty years they need to ensure what can go right and what can go wrong.”
In light of these results it comes as no surprise that Australia is the fourth most active country for ESG investment awareness. There are 141 signed and active ESG investment providers with products aligning with the United Nations Principles for Responsible Investment.
Local investors currently have $30 billion dollars invested in products that are specifically created as an ESG product. This is an increase of 37 per cent in the 12 months to December 2018 and will continue to grow.
Dunnin says: “The debate about ESG has long moved on from having to defend investing this way. In fact, it’s now the other way around – how can long-run investors not take these factors into account?”