Australians are increasingly concerned about whether their investment money is aligning with their values, but the superannuation sector is not always delivering what they want.

There are two ways super funds deliver on members’ responsible concerns.

One is through providing what is known as an ESG (environment, social and governance) overlay to manage all their investing.

The other is providing ethical investment options that allow members to ensure their money is only going to areas with which they are comfortable.

Although there is a lot of talk about growth in dedicated responsible investment allocations, in the super world such funds still make up a small percentage of overall superannuation monies.

“If you are looking at responsible investments options, it is pretty inconsequential – about 6 to 8 per cent of all superannuation funds under management,” said Alex Dunnin, executive director with Rainmaker.

Overall the pooled superannuation sector now has $2.45 trillion under management.

Still small beer

A case in point is Australia’s largest super fund, AustralianSuper, which now has more than $300 billion in value.

But its responsible investment allocations have only about $3.6 billion invested, a little over 1 per cent of its funds.

“ESG and sustainability principles are a rapidly evolving part of Australia’s superannuation landscape with ever-increasing levels of scrutiny being applied to super funds by government, regulators and their fund members,” Dunnin said.

It was once assumed that ESG investing reduced returns with the implication that the costs of it were a drain on super fund profits.

But Dunnin says that comparisons of the performance of ESG indices and unregulated indices show that ESG funds make about 99 per cent of the returns of regular funds.

“So there’s virtually no impact,” Dunnin said.

Rainmaker’s research does show that the top ESG funds using its analysis of their operations perform well.

The picture is different for dedicated responsible allocations within superannuation funds, says Kirby Rappell, executive director with SuperRatings.

“Those funds don’t hold certain types of investments so they perform differently to the overall market,” Rappell said.

“If they have heavy weightings to, say, tech stocks and don’t invest in certain types of mining they will perform better when the tech sector is strong and perhaps not as well if the mining sector outperforms.”

But those responsible allocations have performed well last financial year, with SuperRatings calling their return 9.29 per cent.

The performance of funds with a highly rated ESG overlay also looks reasonable in comparison with the SuperRatings top-performing fund list.

The three top-performing funds – ESS, Brighter and a Hostplus specialist fund – performed at 12 per cent or better, but the rest of the listings were close to what many in the top ESG fund list returned.

Overall the balanced fund sector, where the vast majority of Australians have their money invested, returned 9.2 per cent in the June year, according to Chant West.

Blocking right action

Using sustainability filters to bar investment in certain sectors can actually keep funds from investing in socially useful businesses.

“If you say ‘I don’t want to invest in the mining sector because you don’t want exposure to coal’, for example, then you might be keeping yourself out of investments in metals like cobalt and magnesium that are helping to build batteries,” Dunnin said.

Funding the transition to a net-zero economy “is not just about dumping stock,” Dunnin says.

Developing the new economy will demand more nuance than that as new industries evolve and need support from financiers, he says.

Will van de Pol, CEO of activist group Market Forces, says super funds that offer responsible investment funds are often not delivering what their members say they want.

“Last year we looked at sustainability-branded investment options and reviewed their holdings against a list of almost 200 of the biggest companies expanding their fossil fuel operations,” van de Pol said.

The result was “a concerning level of exposure to those companies among even sustainability-branded products,” he said.

Sustainability options in super funds also mainly focus on blocking holdings in actual production operations like oil wells and gas fields.

They often ignore the companies that provide the infrastructure that facilitates those big projects such as engineering firms, van de Pol says.

Although funds are increasingly focused on ESG issues, that is not necessarily translating into action.

“We’re really frustrated at the moment that there is a lack of progress off the back of that focus,” van de Pol said.

Not such a gas

Big gas producers like Santos and Woodside make up significant proportions of the investment portfolios of big super funds.

Woodside particularly is a company that “has significant fossil fuel expansion plans and recently sanctioned projects that are incompatible with the 2050 scenario [for net-zero emissions] that most of the big super funds have agreed to,” van de Pol said.

It remains a major holding for many super funds.

Dunnin called for caution about levels of activism in super funds: “Super funds should be active investors, not activists.”

However their claims of responsible investing will increasingly come under scrutiny from regulators who are checking their claims.

The New Daily is owned by Industry Super Holdings