The impact of responsible investing on the super industry

Responsible investing, also known as ethical investing, is the alignment of our capital with investments that ensure society can thrive and the environment is not exploited.

Responsible Investment Association Australasia (RIAA) presents a spectrum of responsible investment, ranging from ESG integration, which only tackles the avoidance of harm, through to impact investing, which are investments that avoid harm, benefit stakeholders, and contribute solutions.

Both ends of the spectrum deliver competitive returns, although investments focused on impact create real-economy outcomes for a sustainable future.

RI Australia 2021

RIAA held RI Australia, a hybrid event at the ICC Sydney on Friday, 8 May 2021. Described by the organisers as “a wave that is building”, here are some takeaways about responsible investing from some of the event’s keynote speakers.

1. Returns

While the impact of responsible investing is what makes it attractive, the key motivation behind investing will always be strong returns. Alexandra Clunies-Ross of Artesian (Alternative Investments) stated that their VC funds deliver impact without sacrificing financial returns via collaborative partnerships. Furthermore, Matthew Tominic of Conscious Investment Management spoke on specialist disability accommodation (SDA) portfolios. SDA investments have higher risk-adjusted returns as the investment risk (vacancy) is directly correlated to the social impact, which is to provide disability solutions.

2. Making ‘bad’ harder

New York Times best-selling author Anand Giridharadas criticised the focus of making ‘good’ easier rather than making ‘bad’ harder. Mr Giridharadas claims that this current approach fosters systems that entities can exploit to mislead the consumer, emphasising the key distinction between appearances and structural reality.

3. Sustainability linked loans

Sustainability linked loans, mostly limited to large corporations in the early stage of their conception, are loans with margins subject to pre-determined sustainability metrics. The philosophy behind these loans is that sustainable companies are lower risk and thus, deserve better pricing. This incentivises recipients to meet and surpass targets so they can access discounts.

4. Demand for ethical investment

Abby Wild, research fellow at BehaviourWorks, presented the results of a study which revealed that 53 per cent of the sample would be motivated to increase their savings and investments if they knew it would be having a positive impact on the world. Those respondents who answered unsure were 29 per cent, while only 18 per cent said no. Furthermore, the research reveals an expectation of ethical investment, as 86 per cent of those surveyed agreed that they expect their super or other investments to be made responsibly and ethically.

The superannuation industry:

The superannuation industry is the other forum within which there is a buzz for ethical investments. For example, in December 2020, REST Super responded to increasing consumer demand by developing an ethical and sustainable investment option, which is perhaps the legacy of an important legal battle between the fund and a member.

Mark McVeigh sued REST for not disclosing how, and if, they manage climate risk, which he claimed was a breach of both the Superannuation and Corporations Acts. REST eventually conceded that “climate change is a material, direct and current financial risk to the superannuation fund”, symbolising the beginning of a new era.  

An example of a responsible superannuation fund is Australian Ethical Super. Australian Ethical Super is RIAA certified, meaning they prioritise companies with a positive impact and avoid coal, oil, tobacco, and gambling. Australian Ethical Super’s balanced portfolio has delivered very competitive returns.

According to Finder, Australian Ethical Super has a recent three-year performance of 8.62 per cent, outperforming big names such as Australian Super Pre-mixed balanced option (7.73 per cent), CBUS Growth (7.18 per cent), and HostPlus Balanced (6.36 per cent). Australian Ethical Super has a recent 10-year performance of 8.2 per cent, which is again competitive and suggests that ethical investments can generate sustainable returns.

This comparison is not financial advice but rather insight into why the likes of REST and MLC are gradually diversifying into the responsible investing space.

Divesting v corporate engagement:

If you have investments in unethical companies, what is the best way forward? While divesting is an option, all this effectively does is handpass the problem onto others without any positive impact and real-world outcomes.

The advice from Kado Muir, chair of the First Nations Heritage Protection Alliance, and the CFA Institute’s Future of Sustainability in Investment Webinar was to engage as shareholders. There may be opportunities to exercise voting rights, join conversations and participate in working groups that can bring about positive change. Thus, corporate engagement is far more impactful than simply opting to sell unethical investments.

As responsible investing continues to expand into the mainstream, it will be exciting to watch just how big the movement becomes.

Matthew Cavicchia analyst, Institute of Public Accountants