What Is An Ethical Super Fund? Everything You Need To Know

Ethical super funds promise to invest in ethical areas such as clean energy, and to screen out sectors that are considered bad for the environment, such as fossil fuels, while also growing your retirement savings.

This means the fund will exclude industries considered to be ethically irresponsible or harmful to the environment or socially harmful in some way. It may mean avoiding investing in companies that do not pay their workers fairly in developing nations or who use slave labour in their supply chains. It may also mean avoiding investing in companies that produce weapons or are involved in nuclear weapons manufacturing.

The challenge until recently has been transparency around super fund holdings. However, as a result of mandatory laws that came into effect in 2022 which require funds to disclose portfolio holdings, fund members and investors are better placed to scrutinise sustainability claims.

“This is a significant win for transparency, as, in 2021, just 23% disclosed their portfolio holdings in full and the majority (62%) of funds only disclosed the top 20 holdings,” notes the Responsible Investment Association Australasia (RIAA) in its 2023 Responsible Investment Super Study.

The report also noted: “Many super funds have strengthened their commitment to addressing climate change and other ESG considerations, in line with the evolution of responsible investment standards and practices globally.”

Last year, the RIAA introduced a new leader designation for super funds, the Responsible Super Fund Leader insignia for those super funds that are screening out companies engaged in unethical practices.

There are many reasons why Australians may gravitate towards ethical funds.  Socially responsible investing could help you to generate better returns, and also de-risk your portfolio. It might even help you sleep better if you’re worried about the impact of climate change.

Total assets owned by those designated as Responsible Super Fund Leaders have reached a record $783 billion, figures from RIAA reveal. Many ethical super funds are achieving good results, and are reporting strong member growth, too.

As RIAA noted: “Short, medium and long-term financial performance data for FY2022 confirms that returns do not have to be sacrificed to do responsible investment well. The MySuper products of Responsible Super Fund Leaders performed, on average, as well, or better than, non-leaders.”

To be clear: there is no guarantee that ethical super funds will always perform well so do your research first.

There’s no silver bullet when it comes to investing, no matter where you stash your super. All funds, including ethical funds, will come up against the same market ups and downs as any other investment.

Bear in mind that limiting your investments in one area could mean you’re not quite as diversified as you could be, which is the best way to mitigate your risks to market exposure. Diversification is the name of the game, particularly during periods of market fluctuations.

Of course, not all ethical companies are going to make it in the cut-and-thrust of the business world. A business might have potential now, but where will they be in five years’ time, and are they reading the market right? These are questions that fund managers need to weigh up, and are best equipped to make the decisions that can ultimately see your nest egg grow.

Make sure you compare the fees you will be paying, too, and not let the sustainability focus distract you from other important financial metrics.

The Greenwashing Effect

While most super funds are scrupulous in their green credentials, some, unwittingly or otherwise, make green claims they cannot substantiate. This is known as ‘green-washing’, and it has attracted the ire of the corporate regulator, ASIC.

ASIC is keeping a close eye on funds in relation to:

• The use of terms such as ‘clean’ or ‘green’ and even ‘carbon neutral’;
• fund labels and terminology;
• and the scope and practical application of investment screens.

ASIC has already started civil penalty proceedings against Mercer Superannuation for allegedly making misleading statements about the sustainability of its superannuation investment options, as well as Active Super for allegedly making misleading misrepresentations in relation to investments it claimed to restrict or eliminate.

Most recently, Australia’s largest industry super fund, AustralianSuper, was found to have invested Australians’ money from its ‘Socially Aware’ option in the coal, oil and gas sectors. While ASIC “raised concerns” with AustralianSuper about the wording of its policies it “did not find evidence of the fund misleading its members”.

ASIC deputy chair Sarah Court said funds need to be clearer with the wording they used.

“Many investors are not going to understand the difference between securities and other kinds of assets. They have to be very clear and up-front about that,” she told the ABC at the time.

Some of the key considerations when deciding which ethical super fund to select include:

• What you care about: Think about what you’re particularly concerned about when it comes to the environment and sustainability issues, and see which fund aligns with those values.
• Performance: Just because a fund is ethical, doesn’t mean they’re performing better than other funds. Make sure you consider how the fund has performed over the long term, and bear in mind that past performance is no guarantee of future returns.
• Fees and costs: How much you will be charged on a monthly basis to be a member of a fund is important to to understand.
• Extras: If you’re switching super funds, make sure you’re comparing apples with apples. If your current fund offers insurance or discounts, check if the ethical fund you’re considering switching too does as well.
• The detail: Take the time to read the small print to understand where exactly your money will be invested, and what promises are being made to avoid greenwashing.

RIAA’s approved list of Responsible Fund Leaders are:

• Australian Ethical
• AustralianSuper
• Aware Super
• CareSuper
• CbusSuper
• Future Super
• HESTA
• Rest
• Telstra Super
• Unisuper

To understand the ethical focus of each fund, head to their website and read through their individual investment approach and review their past performance over at least five years. Also note that this is not a comprehensive list by any means, and be sure to do your own research.

Past performance is no prediction of future performance and this article is general in nature and is not intended as a recommendation of any particular investment strategy or product.