Superannuation funds in Australia that implement quality responsible investment practices continue to outperform their peers, according to a newly released report.

For the first time, responsible investment approaches are influencing strategic asset allocation for the majority (55%) of super funds, says a study from the Responsible Investment Association of Australian (RIAA).

NO DOUBT ABOUT IT

The RIAA study covered 53 asset owners, including the 48 largest superannuation funds in Australia, managing 90% of total super assets as of June 30, 2020 and representing almost A$2 trillion ($1.4 billion) in assets under management (AUM).

RIAA reports that super funds now acknowledge without question that ESG factors are critical to investment decisions. Equally, scheme members are taking a growing interest in ensuring their retirement savings are being invested in a responsible manner.

Improved financial returns and managing investment risk are the top motivators for super funds to consider ESG in decisions. Some 42% of super funds now set specific responsible investment targets in their investment policies. Also, 34% of asset owners have mandated targets for portfolio alignment with the Paris Agreement or net zero by 2050.

BETTER ALTOGETHER

Incidentally, average performance of the leaders’ My Super products is better than non-leaders’ over three-, five- and seven-year timeframes.

Performance edge provided by the most responsible supers

Besides their climate commitments, super funds that do well in responsible investing also have greater board gender balance. The boards of leading responsible investment super funds are, on average, more gender-balanced than super fund trustee boards in general. They also provide sufficient resourcing to support a team of three or more ESG specialists integrated into corporate decision-making structures.

GROWING FOCUS ON 'SOCIAL'

The report takes note of the closer involvement of institutional investors in societal issues. Since 2019, many super funds have been keen collaborators in resourcing infrastructure assets — real and social — that support the productive capacity of Australia’s economy, said the RIAA.

“Universal owners are now engaging directly and publicly with the government to improve and strengthen laws that work counter to protecting cultural heritage and respecting human rights.”

Despite progress towards more responsible investment by asset owners, challenges remain, said the report. The vast majority of super funds have yet to set quantifiable performance targets on ESG issues, or to ground the implementation of responsible investment strategies.

To be one of RIAA’s leading responsible investment supers, a fund must demonstrate a comprehensive responsible investment approach across five separate pillars by achieving an overall score of 70%. The five pillars cover the main elements of good governance, from commitment through to implementation, measurement, reporting, and review.

Leading responsible super funds in Australia

The report notes that leading responsible super funds are more systematic about ESG integration and are more likely to commission ESG research that specifically addresses their needs. Of the leaders listed here, 92% employ asset consultants with responsible investment expertise, up from 65% in 2019 and 55% in 2018. Only 52% formally monitor their responsible-investment-related services; 35% of funds conduct informal monitoring.

ASSET OWNERS' TAKE

Aware Super, one the leaders on the RIAA list, undertakes a baseline scenario analysis for its climate-related investments that considers on the one hand a business-as-usual scenario (a 3.5°C average temperature rise), and a delayed policy action scenario, where physical climate risks are more moderate, but the late onset of policy action results in higher transition risks. This approach is similar to other asset owners in Asia, such as Singapore’s GIC.

Aware Super sets this scenario against a more proactive global action scenario, characterised by immediate coordinated effort to reduce emissions, thus moderating the physical consequences of climate change as well as transition risks. An emergency scenario with aggressive policies and major technology shifts that create high transition risks but lower physical risks, is also used for comparison. 

Once the team has carried out its stress-testing, Aware Super then sets targets for investment in low-carbon, renewables, and climate-related businesses. Aware Super aims for a 30% reduction in emissions across its listed equity investment portfolios by 2023.

By October 2020, the fund had divested from thermal coal mining and had committed approximately $1 billion to renewables and low-carbon technologies.

RIAA reports that its work and other industry collaborations such as the Australian Sustainable Finance Institute and the Investor Group on Climate Change “have lifted expectations of sustainable investment, and are helping move the industry towards leading standards of practice that contribute measurably to a more sustainable world.

“Couple this with the task of financing the transition to net zero carbon emissions no later than 2050 and the economic recovery from the Covid-19 pandemic, and responsible investing has never been so relevant for the superannuation sector to embrace.”