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For an increasing number of Australian investors, returns aren’t the only factor they’re concerned about when managing their super fund. Recent years have seen a marked growth in the popularity of ethical investing, which involves considering a company’s social and environmental impact before choosing it as an investment.
But does ethical investing produce satisfactory returns, and how can you choose an ethical super fund? Read on to find out.
Compare super funds that offer ethical investment options
*Past performance data is for the period ending December 2018.
What is an ethical investment super fund?
Ethical investing, also known as responsible investing, is when you select an investment in line with your moral, ethical or political values.
This means that when researching and analysing the financial viability and potential returns an investment provides, the responsible investor will also consider social, environmental, governance or ethical factors.
For example, an ethical investor may want to avoid putting their money towards a company that specialises in the production of fossil fuels, tobacco or munitions.
The 2016 Responsible Investment Association Australasia report revealed that 47% of Australia's investments ($633 billion) in 2015 were responsible ones, a 0.6% rise on the previous year.
An ethical investment super fund is therefore a superannuation fund that chooses investment options based on a set of social, environmental and ethical criteria. If an investment does not satisfy these criteria, it will be excluded. This is known as a negative screen.
Some super funds that specialise in ethical investments also conduct what are known as positive screens. A positive screen involves actively searching for companies that are having a beneficial impact on society or the environment as a whole, for example sustainable energy or recycling companies, as potential investment opportunities.
Some ethical investment funds also conduct a “best of sector” approach. This involves choosing the best companies for environmental, social and governance performance across a wide range of industries, providing access to a diverse range of economic sectors.
Why should I invest in ethical super?
The basic premise behind ethical investing is that you put your money where your mouth is to support the causes and companies that match your values and beliefs. If you want to make the world a better place, having a say in where your money is invested can help you do just that by supporting the companies that value the same things you do and not supporting those that don’t.
Critics of ethical investing have in the past claimed that choosing companies based on their social or environmental footprint meant sacrificing returns. However, Australian ethical super performance figures in recent years have debunked this myth.
The Responsible Investment Association of Australasia (RIAA), the peak body that represents Australia and New Zealand’s responsible investors, has gathered data on the growth and performance of Australia’s responsible investment industry. These figures regularly show that responsible investments outperform mainstream investments across a wide range of assets - see the ‘What’s the return on investment for ethical super funds?’ section below for more details.
Where is my superannuation invested?
Many Australians are unaware of where their superannuation fund invests their retirement savings. Australia’s 50 largest super funds have nearly $1 trillion of undisclosed assets under management, but despite this fact, some 86% of Australians believe super funds should increase transparency and disclose where their money is invested.
If you choose an ethical super fund, your super balance can be invested in:
- Sustainable companies, such as renewable energy, green technology or sustainable agriculture.
- Investments that provide social benefits, such as companies that direct capital to struggling individuals or communities in need of support.
- Companies that provide healthcare and medical solutions.
- Education providers.
- Responsible banks.
- Aged care providers.
You can also use an ethical approach to investing to exclude (and therefore not offer financial support to) companies involved in controversial industries, such as coal seam gas, tobacco, firearms, fossil fuels, gambling or pornography, or controversial practices, such as employing child labour.
The key to responsible investing and ethical super funds is transparency. Once you know exactly where your money will be invested, you can make an informed decision about whether a fund is right for you.
What’s the return on investment for ethical super funds?
The RIAA’s annual Responsible Investment benchmark report tracks the performance of ethical investments vs non-ethical investments. The 2016 report revealed that:
- Core responsible investment Australian equities funds outperformed the ASX300 and the average large cap Australian equities funds across one, three, five and 10 years.
- Core responsible investment international equities funds outperformed large cap international equities funds over five and 10 years, but not in the short term.
- Core responsible balanced funds outperformed their equivalent mainstream balanced funds over one, three, five and 10 years.
Of course, it’s worth pointing out that past performance is no indicator of future performance, but these figures certainly suggest that choosing an ethical super should not be ruled out based on the belief that it will not provide adequate returns.
What are the risks of investing in ethical super?
Investing your retirement balance with any superannuation fund requires a certain level of risk, as there is always the chance that financial markets will underperform and your super will take a hit.
However, the main risk you need to consider if you choose an ethical investment approach is that you will miss out on some opportunities. Just because a company isn’t environmentally sustainable or doesn’t match your moral views doesn’t necessarily mean it won’t have financial success, so you may miss out on returns you could have taken advantage of had you invested in another fund.
Who offers ethical super in Australia?
An increasing number of Australian super funds offer ethical super options to their members. Some of these include:
- HESTA
- Australian Ethical
- Future Super
- Christian Super
- Good Super
- Local Government Super
- First State Super
- SunSuper
However, while some funds are 100% dedicated to a responsible investment approach, others only offer individual products that meet ethical investing criteria. With this in mind, it’s important to research super funds and individual products to get a better idea of whether or not they match your values.
What are the fees like for ethical super funds?
Fees vary between funds, so it pays to do some research and compare the fee structures of different ethical super funds with ordinary retail and industry super funds. As a general rule, ethical super funds tend to charge higher fees than some other funds, in particular passive retail funds and industry funds, the argument being that these fees cover the comprehensive research that goes into each investment chosen by a responsible fund. However, you may find that actively-managed retail funds charge higher fees than some ethical super funds.
It’s also worth pointing out that fees are only one part of the picture when determining the value for money offered by a super fund. You need to consider the net performance of a fund – what your returns will be after fees have been subtracted – to get a clear idea of whether it’s right for you.
Finally, a relatively new ethical super fund may charge higher fees than one that has been established for a longer period of time. This is because an increase in the number of members may allow a fund to lower its investment fees.
How do I choose an ethical super fund?
There are several factors you should consider before choosing an ethical super fund, including:
- Accreditation. The RIAA offers a Responsible Investment Certification Program to help you find ethical super funds and products. At the time of writing, three super funds (Australian Ethical Super, Christian Super, Local Government Super) had received whole-fund certification, while individual products from several other funds had also been certified.
- Performance. While past performance does not indicate future performance, it’s worthwhile examining a super fund’s investment performance to see the returns it has generated. How do these compare to the returns of other super funds?
- The companies it invests in. Take a closer look at the individual companies the fund will invest your money in? Are there any there that do not align with your values and beliefs? Examine your ethical super investment options before making your final decision.
- Screening process. How rigorously does the super fund screen companies it considers for investment? Does it use negative screening, positive screening and/or a best of sector approach?
- Misleading claims. Keep an eye out for funds that make misleading or exaggerated claims about their ethical status in their marketing materials. For example, even if a fund claims it is “green” it may still invest your money in an industry you may not approve of, for example arms production.
- Fees. The cost of investing will always be a factor worth considering. Compare the fees charged by different funds but remember to consider these in line with each fund’s overall performance.
Compare different types of super funds
If an ethical super fund doesn't seem like the right option for you, or if you'd rather prioritise factors such as a wide variety of investment or insurance options when choosing a super fund, you can use the table below to find out more about other types of super funds.
| Super fund type | Description |
|---|---|
| MySuper | Under Australian law, most employers are required to offer a MySuper-type fund as a default option for people who cannot (or don’t wish to) select their own fund. These are generally found as defaults, but you may also nominate a MySuper fund. It’s designed to be a safe option for most Australians, and is characterised by:
|
| Retail funds | Widely-available commercial products, operated by financial institutions to turn a profit for themselves and their customers. These will typically be nominated, rather than selected as a default. Retail funds can vary widely, but are often characterised by:
|
| Industry funds | These superannuation funds are generally designed for workers in a specific industry, and may be especially beneficial. Some industry funds are restricted to workers in a specific industry, while others are open to everyone. Industry super funds will often be available as a default, or might be nominated. Sometimes a super fund will be both an industry fund, as well as a MySuper fund. The key difference between these funds and retail funds is that they are owned by members not shareholders. They can vary widely, but are often characterised by:
|
| Corporate funds | These are super funds a business offers to its employees. They might be exceptionally competitive, such as in the case of defined benefit funds. Naturally these will typically be found as default funds with various advantages and features. |
| Self-managed super fund (SMSF) | The do-it-yourself super fund. You are responsible for investing your superannuation, as well as looking after the tax and legal obligations that go along with it. These are explained in more detail in this guide. |
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