Australia’s catastrophic bushfire season has prompted many people to consider how they can help address climate change concerns in the way they manage their households and their finances. When it comes to their superannuation, the Responsible Investment Association Australasia lists 14 funds it considers the leaders in ethical and sustainable investing, including climate change.
They are Australian Ethical, AustralianSuper, CareSuper, Cbus, Christian Super, First State Super, Future Fund, Future Super, HESTA, Local Government Super, NZ Super Fund, Unisuper, VicSuper and Vision Super.
RIAA chief executive Simon O’Connor says: “We are witnessing a strong uptake of responsible approaches to managing retirement savings by super funds and other large asset owners. Increasingly, our largest institutional investors are considering environmental, social, governance and ethical issues as a core part of their decision making.”
O’Connor the change is being driven by three factors: greater acceptance that ESG factors are a standard part of investment practice; a growing interest among Australians in seeing that their retirement savings are being invested in a responsible manner; and an increasing focus by regulators on the relevance of issues such as climate change risk.
The RIAA’s research shows one of the things that sets the top rated funds apart is that accountability for RI is at the highest level of the fund – either at the trustee level or ESG-style sub-committee or dedicated secretariat, including climate risk.
The number of funds systematically considering climate change at board meetings has double over the past couple of years to 18 per cent of funds surveyed. And boards are strating to adopt the reporting recommendations of the Task Force on Climate-Related Financial Disclosures, which promotes consistent and comparable reporting.
Four funds – Australian Ethical, Christian Super, Future Super and Sunsuper – told RIAA that climate risk was a standing item on their board agenda.
Another six said they have dedicated trustee sub-committee that consider the issue. They are CareSuper, Cbus, First State Super, Local Government Super, QSuper and Unisuper.
RIAA found that 51 per cent of super funds surveyed are employing one or more full-time staff with significant responsibility for responsible investing. RI employee numbers in super funds have quadrupled since 2016.
The RIAA has also tracked fund performance, using MySuper performance data, and found that “super funds comprehensively applying responsible investment principles outperform their peers.”
Using a benchmark of 54 MySuper funds, RIAA found that over five years to June this year the average return was 7.98 per cent a year.
There were 34 MySuper funds using responsible investment strategies. They produced an average return of 8.14 per cent a year over the five years. The MySuper options offered by the 14 funds on the RIAA leader board produced an average return of 8.71 per cent over the period.
There are some areas where improvement is needed. RIAA found that company engagement is increasing but half of the funds surveyed do not disclose engagement activity or outcomes.
It also found there was a disconnect between investment principles and voting policies, with few fund managers imposing voting policies in line with super funds’ policies.
The report was repared with data and data processing provided by APRA, Refinitive, ISSESG, RateCity and MarketMeter. It was supported by Amundi Asset Management.
The funds were assessed on five criteria:
Accountability and governance. Eighty-one per cent of funds report that they have some form of RI commitment in place and 93 per cent say that stakeholder input informs investment policies.
The proportion of funds systematically considering climate issues at board level has doubled since the 2018 survey to 18 per cent. Thirty-nine per cent are signatories to a stewardship code.
Responsible investment commitment. Seventy-two per cent of funds integrate ESG factors into financial analysis, 61 per cent have at least one negative screen across the whole of the fund (up from 34 per cent in 2016) and half have formal engagement policies.
ESG integration has emerged as the preferred approach to responsible investing. This means incorporating ESG into all the fund’s financial analysis. Active ownership, which involves engagement with companies and participating more as asset owners, is growing in importance.
Responsible investment implementation. Close to half (47 per cent) of funds report that responsibility for RI implementation is incorporated into asset manager investment management agreements.
Sixty-five per cent of funds employ asset consultants with RI expertise, up from 55 per cent last year. Seventy-two percent of the RI options in the sample are RIAA certified and are therefore tested as “true to label”.
Measurement and outcomes. One quarter of funds set specific RI targets against which to track and report performance.
Forty-four per cent of funds are involved in direct corporate engagement and all monitor the actions of the company after the engagement. However, only a little over haf of those funds produce and engagement report.
Transparency and responsiveness. RIAA says transparency is on the increase, with 72 per cent of dunds disclosing annually on their RI activities – up from 44 per cent in 2016.
However, corporate engagement disclosure is low, as is reprting of full equity holdings.
Fewer than 20 per cent of funds provide an online tool for members to compare features and returns of RI options.
O’Connor says: “In the current political climate there is a lot of debate about ethical investing. What we have put together is an evidence base that it is good investment practice that leads to better outcomes.”