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ESG Focus: Climate Changing For Super Funds

ESG Focus | Dec 18 2019

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Climate Changing For Super Funds

Australian super funds undertaking ESG-based investment are outperforming the industry while ceding to a growing demand from Australian investors.

-Responsible investment growing
-RI funds outperform peers
-Strong demand from Australia investors

By Greg Peel

In 2016, 70% of Australia's largest superannuation funds said they were committed to responsible investment, and 44% reported on responsible investment activity. The latest report from the Responsible Investment Association Australasia notes those numbers have now risen to 81% and 72% respectively.

The RIAA's Responsible Investment Super Study 2019 presents the results of an annual survey of Australia's 57 largest super funds, accounting for $1.75trn in assets under management.

"This year's report shows that Australia's largest superannuation funds – including industry, retail, corporate and public sector funds – are ramping up their engagement in responsible investing to drive superior financial performance, reduce risk, and deliver better outcomes for their members and beneficiaries," said Simon O'Connor, CEO of RIAA.

The report also shows that in the face of rising public concern and increasing financial materiality of climate change, the consideration of climate risk by super fund boards continues to grow, but there remains room for improvement.

It would be logical to assume that a decision to invest "responsibly" may result in a handicap on fund return potential compared to returns from funds which invest without discrimination. However, the opposite is true.

Australian super funds that "comprehensively" engage in responsible investment are outperforming their peers over one, three and five-year time frames, the report has found.

Thirteen Australian super funds are identified as leaders in articulating and demonstrating a comprehensive approach to responsible investment – Australian Ethical, AustralianSuper, CareSuper, Cbus, Christian Super, First State Super, Future Fund, Future Super, HESTA, Local Government Super, Unisuper, VicSuper and Vision Super – along with NZ Super Fund.

This year, RIAA compared the the default MySuper performance of super funds employing responsible investment strategies with the MySuper options of those super funds that are not. The performance data reveals the MySuper option of responsible investment super funds outperform the MySuper option of non-RI super funds over five, three and one-year time frames.

The comparative performance of the aforementioned thirteen leading RI funds shows about 100 basis points (one percentage point of return) of outperformance over the the rest of the pack.

"This reinforces how important the consideration of environmental, social and corporate governance [ESG] factors is to delivering the best possible outcomes for super fund members," says O'Connor.

Burning Issue

There is little doubt the country's current focus is firmly on the impacts of climate change, as stark reality catches up with longstanding warnings. The RIAA is encouraged to find a doubling of super fund boards "systematically" considering climate risk in investment decisions, however possibly three quarters of trustee boards are inadequately accounting for climate risk in the face of "increasing materiality, relevance and rising regulatory expectations".

Some other findings:

• 81% of super funds have some form of responsible investment commitment in place

• 61% of super funds have a least one "negative screen" across the whole fund, up from 34% in 2016

• The most popular fund-wide exclusions are tobacco and armaments, followed by fossil fuels

• More than half of super funds offer a total of 88 responsible investment options (compared to 24 funds offering 54 options in 2016). Retail funds offer the largest variety of RI options per fund

• Responsible investment employee numbers have doubled since 2018 and quadrupled since 2016

• The UN's Sustainable Development Goals are being integrated by a range of funds into their responsible investment strategies

Climate change is not the sole focus of responsible investing. Some super funds are choosing to co-file resolutions on a range of issues including the human rights of asylum seekers and the protection of workers from labour abuses, the RIAA notes, as well the membership of industry associations whose advocacy is inconsistent with the Paris Agreement.

Yet, while responsible investment reporting is improving, half the super funds involved in corporate engagement are not reporting on their activities publicly. Furthermore, many of the largest super funds are still not showing clients how their money is being invested on their behalf. Just 12% of super funds publish their full equities holdings.

Which is to the disadvantage of the non-publishing funds, when one considers the RIAA has found that 92% of Australians expect their super or other investments to be invested responsibly and ethically, and 78% would consider moving super or other investments to another provider if their current fund engaged in activities not consistent with their values.

"If the superannuation industry is to realise its potential for delivering long-term retirement outcomes, super funds need to be demonstrating how they are fuelling a productive, prosperous and healthy future for their members," said O'Connor. "This report shows us that this responsible investment is not just something Australians want, but is a critical part of delivering stronger member outcomes".

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