Responsible investment for super funds is delivering for members

By Simon O’Connor, CEO, Responsible Investment Association Australasia and Co-Chair, Australian Sustainable Finance Initiative.


There’s been much debate recently around the appropriateness of investors targeting Australian businesses to protect our environment, to lift standards of human rights, and superannuation funds exercising their ownership on issues such as climate change.


This is the tip of a much bigger iceberg. Our business news cycle is regularly filled with all kinds of issues historically deemed non-financial in nature, from the underpayment of wages and incidences of modern slavery, to breaches in corporate conduct, the implications of corporate culture, and lobbying by trade associations whose policies contradicts those of their members. Far from non-financial, these issues are increasingly translating into financial considerations for Australian businesses, shifting markets and driving share price movements.


Numerous studies, including a detailed study out of Harvard Business School, highlight why this the case: companies who manage ‘non-financial’ factors well, make stronger, more resilient and lower risk companies. They also get access to lower cost of capital, are better able to access new markets, and enjoy greater operating efficiencies.


In short, companies integrating environmental, social and governance (ESG) considerations into their businesses make better investments.  And when aggregated to a portfolio level, a portfolio of better managed companies from an ESG perspective leads to better investment outcomes.


It’s this understanding that explains why 80% of Australia’s largest super funds – spanning industry, retail, corporate and public sector funds – have in place commitments to undertaking a responsible investment approach across their portfolios.


Launched today, the Responsible Investment Association Australasia’s Super Study 2019 shows that our superannuation funds are ramping up their engagement in responsible investing to drive superior financial performance, reduce risk, and better meet their members’ expectations. This includes systematic assessments of these ‘extra-financial’ risks in all their investment decisions to understand how they impact investment outcomes.


Why? Because for a superannuation fund, responsible investment is ultimately about delivering better outcomes for members to ensure their best possible retirement.


RIAA’s Super Study demonstrates that Australian super funds that comprehensively engage in responsible investment are outperforming their peers over 1, 3 and 5-year time frames. This correlates with RIAA’s Responsible Investment Benchmark Report 2019 showing responsible investment funds largely outperforming their mainstream counterparts as well as their relevant benchmarks.


Responsible investment strategies vary across super funds but most use a number of approaches including integrating ESG factors into valuations, screening out sectors, corporate engagement and voting, and increasingly, impact investing.  This includes engaging to shift corporate activities such as pushing for increased gender diversity at boards, advocating stronger climate change risk management, as well as seeking greater disclosure over work place issues and carbon emissions. And when engagement is not resulting in better management of these risks, funds may choose to vote against directors or vote down remuneration packages. From sustainable agriculture to renewable energy and aged care, many super funds are also making investments that deliver measurable positive impact. And at times, some are divesting companies from their investment portfolios.


Just as super funds are acknowledging the increasing materiality of ESG issues, we are hearing consistently from regulators and governing bodies such as APRA, ASIC, ASX, AASB and RBA statements and guidance, that corporate Australia, along with the finance sector, needs to be doing more to monitor and manage these risks.  It is perhaps the greatest risk facing trustees of super funds today that they don’t refresh their understanding of their duties within this new operating context and fail to manage the full range of ESG risks in their portfolio, including climate change.


With the world committed to the Paris Agreement target of net zero emissions by 2050, any investor with a long-term horizon would be remiss not to consider the impacts this Agreement will have on our economy and integrate this into investment decision making.


With the Government legislating a Modern Slavery Act late last year, it would be remiss of a super fund not to engage with companies on how they are managing these human rights risks within their operations and supply chains.


Similarly, when our financial market regulators are emphasising the first order economic ramifications of climate change, whose effects are now foreseeable and actionable, it would be remiss of super funds not to be seeking strong disclosures and management of climate risk from their portfolio holding companies. And it would be equally remiss of them not to require the companies they invest in to avoid lobbying against government policy that sets in train the smoothest and least disruptive transition to our economy consistent with those nationally agreed targets.


If the superannuation industry is to realise its potential for delivering long-term retirement outcomes, it needs to be fuelling a productive, prosperous and healthy future for Australians.  Responsible investment is essential for our superannuation funds to manage investment risk, and ultimately ensure the best outcomes for us in retirement.