As many as 86 per cent of Australians now expect their superannuation and other investments to be held in funds that act responsibly and ethically but many would be disappointed if they knew what their money was really doing.
Evergreen Consultants have run the ruler over the Australian investment cohort of funds claiming to deliver ethical or environmentally sound investing criteria and they found all is not as it seems.
“What the data is showing us is that up to 10 per cent of the funds we’ve looked at that claim to have ESG [environmental, sustainable, governance] orientation in their investments actually don’t,” Evergreen’s director Michael Ohlsson told The New Daily.
“That is what is referred to as greenwashing.”
Greenwashing in the gun
That effectively means that investors are not being told the truth about where their money is and it is starting to worry regulators.
ASIC commissioner Cathie Armour said in July that greenwashing is now in the regulatory gun as “86 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically”.
“ASIC is currently conducting a review to establish whether the practices of funds that offer these products align with their promotion of these products; in other words, whether the financial product or investment strategy is as “green” or ESG-focused as claimed,” Ms Armour said.
“Boards should be mindful that prohibitions on misleading and deceptive conduct and false and misleading statements apply in relation to financial products such as securities or interests in funds. Accordingly, we encourage boards to look out for any greenwashing.”
What’s in a name?
Classification of ESG products is something of a moving feast and tighter regulations would likely knock some funds out of contention.
Recent research by the Responsible Investment Association of Australasia (RIAA) noted that “in the case of the EU, sustainable investments declined in absolute terms by 13 per cent between 2018 and 2020 owing to revised definitions of sustainable investment”.
“Australasia is moving in a similar direction to Europe,” said RIAA CEO Simon O’Connor.
“While stronger sustainable investment standards are largely being driven by industry, regulators across Australia and New Zealand are beginning to follow the EU in also pushing for stronger standards.”
However, despite the strengthening of some ESG standards, “certified responsible investment funds under management (FUM) grew to over $56.3 billion as at the end of December 2020 on the back of sustained investment performance and strong inflows, accounting for 7.7 per cent of the comparative market,” RIAA said in a statement.
Using a less stringent standard than RIAA applies to its members, a joint RIAA-KPMG survey released last September found that $1.15 trillion in assets under management fitted into the category of sustainable.
That was a rise of 17 per cent from 2018 and accounted for 37 per cent of Australia’s total $3.155 trillion in professionally managed assets.
Not what it says on the tin
Evergreen’s research came up with some surprising results, too.
“We found that some funds that don’t have an ESG or ethical label actually scored better on our spectrum than some of the funds that are labeled ethical or responsible,” Mr Ohlsson said.
Evergreen will soon release a product for fund managers and investment advisers that will rate about 400 investment products on their ESG performance to help share those insights with investors.
Investors and super fund members are increasingly favouring ESG funds on performance, and not just on philosophical grounds.
“Our Responsible Investment Benchmark Report 2020 showed Australian and multi-sector responsible investment funds outperforming mainstream funds over 1, 3, 5 and 10-year time horizons,” said RIAA executive manager Nicolette Boele.
Further analysis showed this outperformance continued amidst the massive market disruption brought on by the COVID-19 pandemic.
“Responsible investors are ahead of the game. They are identifying the key themes influencing markets and returns, which helps them to better navigate turbulent times; to avoid the biggest risks and to capture more opportunities,” Ms Boele said.
Superannuation funds are increasingly offering ESG options to members and these are showing strong returns.
HESTA’s Sustainable Growth Investment Option returned 23.03 per cent return last financial year while AustralianSuper’s Socially Aware option returned 19.37 per cent.
Those returns were better than the averaged balanced option where most members have their money. The median MySuper default fund returned 17.1 per cent for the financial year, according to Rainmaker.
It’s about the portfolio
Future Super co-founder and director Adam Verwey said there was a big difference in how super funds were reporting on carbon.
“You might get a graph or the outputs as a number, but you don’t really get to see the information behind it – what carbon are they counting or not counting in their calculations,” Verwey said.
“Lots of super funds are making net-zero commitments which is a really good step, but we also need an agreed understanding about what that means.”
Sometimes members confuse the reporting of a super fund’s own emissions with the emissions from the companies in which they invest.
“I don’t think most Australians are thinking too much about the super fund headquarters – they’re really thinking about the emissions in their portfolio,” Mr Verway said.
“Australian and global sharemarket returns have increased by over 60 per cent in the last decade.
“If you look at just the fossil fuel companies, they’ve gone backward by between 30 per cent to 50 per cent.”
The New Daily is owned by Industry Super Holdings