Finance Your Super How to choose the best ethical superannuation fund

How to choose the best ethical superannuation fund

You need to do some work to find the most profitable sustainable investments. Photo: TND
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Investors and superannuation fund members are increasingly concerned about directing their money to responsible and sustainable funds and that choice is starting to pay dividends.

New research from the Responsible Investment Association of Australia (RIAA) has shown that not only is more money going into responsible investments, but the super funds in that space are doing better than the average. What RIAA classes as the leading funds in the responsible space have returned between 0.87 per cent and 0.56 per cent more than run of the mill funds over three, five and seven years – the result is more money in member accounts.

The study found 25 per cent of superannuation funds were leaders in the responsible investing field, and money has been flowing strongly to them over the past two years.

Back in 2019 those funds accounted for just 28 per cent of pooled super under management, but by 2021 this figure had jumped to 42 per cent.

So marked is the switch to responsible investing and the better returns it earns that the value of assets outside those top performing sustainable investors is actually falling in absolute dollar terms.

RIAA classed 13 super funds in the leadership class in renewable investing. But concern for environmental issues is not restricted to them, with 92 per cent of funds focusing on climate risk at top management level compared to 74 per cent in 2019 and 64 per cent in 2018.

If you are one of the people who want to put your savings to work ethically but are not doing so at the moment there are a number of ways you can go about it.

“If you are a member of a super fund you can go to the managers and say ‘do you have an ethical fund’ and typically the answer is yes,” said Wayne Leggett, a planner with Paramount Financial Solutions.

If the answer is no, then obviously you need to go looking for a fund that does have an ethical option.

That shouldn’t be a problem as a simple Google search will deliver a list of funds that do deliver ethical investment options.

If you are in a big industry or retail fund then the ethical option “is unlikely to compromise your performance because it will have a wide mix of investments in it,” Mr Leggett said.

That means it will be a well diversified portfolio that may exclude companies outside the responsible guidelines but will list strong performers elsewhere. For an increasing number of people, simply choosing the responsible or sustainable option run by a big super fund may not be enough if they want to delve into the nature of their investments more completely.

If you are in this camp then there are a number of things to consider.

“One thing is what sorts of industries do you want to exclude from your investments. That’s called negative screening,” said Antoinette Mullins, principal with Steps Financial.

“In a portfolio that aligns with your values there will be things you might  want to exclude, like tobacco, gambling and certain types of mining, Ms Mullins said.

Then there is positive screening that sees you wishing to include certain types of investments such as renewable energy, certain types of health care and perhaps electric vehicles.

So if you want to go the extra mile  you can check with your super fund on the details of inclusions or exclusions and if you are unhappy go through the process with another fund.

If you are really passionate about the area you can “go deeper into the details of investment funds and look at supply chains,” Ms  Mullins said.

That means if, for example, you don’t want to invest in coal mining, you might look into an investment portfolio to see that not coal mining and  mining services companies that service coal mining are excluded.

Some people are prepared to sacrifice a little of their returns to achieve this.

“There’s an increasing number of people, particularly Millennials, who want to see their money being put to good use first and deliver them a good return second,” said Mr Leggett.

Source: Leaf Ratings

That means they might choose a fund that has higher fees than a standard industry fund, but is rated more highly on an ethical scale determined by the investor or agencies.

The above chart is from Leaf Ratings, which puts its own responsible overlay on the super system and gives a high rating to some funds that have higher costs but score better on its responsibility scale.

Leaf also provide ratings for investments outside super with a range of exchange traded funds and equity funds that meet its investment criteria. Leaf has three criteria:

  •  Removing industries and stocks harmful to the environment and society.
  • Including companies with environmental or social benefits.
  • Providing evidence of the funds positive social and environmental impacts.

If you want to get a really good perspective on the companies you invest in it is advisable to think about the way they treat their workers and the people in their supply line as [well] as their actual activities, said Stevie-Jade Turner, of Tribeca Financial.

It is easier to find ethical options in the standard balanced or growth fund with 70 per cent growth assets and 30 per cent defensive assets, Ms Turner said.

So if you are not in that category you might need to spend more time and effort on finding responsible investments that fit your needs.

The New Daily is owned by Industry Super Holdings