While the socially responsible investment of the health and community services super fund, Hesta, has blitzed its rivals over all time frames up to 10 years, it runs counter to the trend.
Ethical options have mostly underperformed the standard options of super funds, showing there is a price to pay for those fund members investing with a conscience.
Though, with many ethical portfolio not investing in challenged industries such a coal and investing in renewable energy technologies, the returns may well improve.
Hesta’s Eco Pool option produced an average annual compound return for the 10 years to June 30 this year of 6.5 per cent – the best-performing sustainable investment option.
That compares to the median-performance of sustainable options over the same period of 4 per cent.
Over most time periods, the Eco Pool option has also outperformed standard balanced options.
However, the bigger picture is most sustainable options struggle to keep up with standard options over most time periods.
The gap is significant. For instance, for the 10 years to June 30 the median-performing sustainable option’s return of 4 per cent is behind the 4.8 per cent of mainstream offerings.
And over 5 years, sustainable options returned 9.4 per cent compared to 10 per cent for mainstream balanced options.
Jay Stiles is pleased switched from Hesta’s standard offering, the Core Pool, to the Eco Pool more than 3 years ago.
While always believing he could invest sustainably without sacrificing returns, he’s thrilled the option has done much better than he expected.
“It’s important to attempt to address a range of issues such as fossil fuels and climate change, which is one of the most pressing challenges of our time,” he says.
“It’s an issue that will will impact future generations,” he says. He also likes the fact that the option has tough exclusions on tobacco-related activities.
“There would not be too many people who would disagree that not investing in tobacco is the right thing, given the effects of people’s health,” says the 29-year-old health economist from Melbourne.
Debby Blakey, the chief executive of Hesta, points out that responsible investment principles are incorporated across all of the fund’s portfolios.
The Core Pool, which is the default option for members who do not choose an option and is where most members have their super, does not invest in companies involved with the production of tobacco products.
While the fund is open to all, most members work in the health and community services sectors.
“Our members see the impact of tobacco far more than most people,” she says.
“It’s about managing long-term risk and it’s also looking at it from the point-of-view of what our members would expect of us,” she says.
As well as not investing in the makers of tobacco products, the Core Pool does not invest in companies with new or expanded thermal coal operations.
The Eco Pool take the exclusions to a higher level.
It excludes companies involved with fossil fuels and uranium and has a broader exclusion on tobacco than its Core Pool, extending it to those companies who supply products to tobacco makers.
Companies that distribute tobacco products are also excluded if it’s more than 15 per cent of revenue.
In addition to negative screens, the Eco Pool invests in sectors such as green-rated non-residential property and clean-tech private equity, which invests in earlier-stage companies.
Kirby Rappell, the research manager at SuperRatings, says sharemarkets have posted strong results for the year ending June 30, 2017 and Eco Pool has has benefited from its higher tilt to shares.
Eyes wide open
Fund members need to be aware of some of the common characteristics of ethical options before signing-up, Rappell says.
“They often have more concentrated portfolios as they may not invest in certain sectors in accordance with their environmental, social and governance criteria,” Rappell says.
“The narrower investment universe, the bigger the likely differences in performances when compared to standard balanced options,” he says.
“For example, if the performance of tobacco companies or miners was particularly strong over a given period then the standard balanced option may outperform its sustainable counterpart if it does not exclude these sectors,” he says.
“Although, the reverse is true if these areas underperform,” he says.
“It’s worth remembering the long-term nature of super,” he says
“While performances may have been below the balanced option median-performer, these options may be well positioned for future changes in markets,” Rappell says.
Other good performers include AustralianSuper’s Socially Aware balanced option, which has a 10-year return of just under 6 per cent and a return over 5 years of 11.5 per cent.
It is the biggest sustainable option of all with about $1.4 billion, out of total retirement savings held by AustralianSuper of about $120 billion.
AustralianSuper’s Andrew Gray, who manages investments governance, says the Socially Aware option excludes companies that own reserves of coal, oil, gas or uranium.
The Socially Aware option excludes companies that produce tobacco, munitions and landmines and companies that have human rights, labour, environmental or governance controversies.
It also exclude companies from among the largest 200 that have single gender boards – with excludes up to a dozen companies with all male boards; though, it would potentially exclude all-female boards.
The Socially Aware option is expected to deliver about the same returns as the standard balanced option over the long term, but with more volatility of those returns, he says.
Gray says that though the mainstream balanced option does not have any screens, Australian Super engages with the companies in which it invests.
As well as talking to companies it votes the shares that it owns at annual general meetings to influence the companies on behalf of it more than one million members.
Sugar could be next target for screening
While tobacco and uranium mining has long been exclusions for some options, coal has been a more recent exclusion as the old coal generation model makes less financial sense.
In March 2017, AMP Capital released a report that identified a number of emerging trends in sustainable investing.
AMP Capital identified sugar as an emerging as an investment risk for the global food and beverage industry as taxes on sugar were being imposed around the world.
It was likely that as obesity increases around the world – 39 per cent of adults globally are now overweight – and more governments take action, that would limit the “growth profile of companies manufacturing and selling products with high sugar content” the report says.
AustralianSuper’s Gray says obesity is one of the big emerging themes. “This obesity and sugar topic in the environmental, social and governance world is going to become a very big topic,” he says.
Another areas nominated by Gray and by the AMP Capital include labour, human rights and supply chains.
The AMP Capital report notes that retailers and manufacturers are only just starting to audit their lengthy supply chains in response to growing scrutiny.
Gray says that transparency by companies is increasing and a useful tool is the Workforce Disclosure Initiative, to which Australian Super is a signatory.
“It’s about encouraging better disclosure by companies on this issue,” Gray says.
The story Super members give up returns to invest with a conscience first appeared on The Sydney Morning Herald.
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