While few people pay attention to their accumulating funds until they are staring down the barrel of retirement, it is worth examining where superannuation contributions are being invested to determine genuine versus greenwashing claims and the impact on returns. Under the Superannuation Guarantee, employers pay a minimum of 11% of wages into their employees’ super funds as part of a compulsory savings regime that is the envy of the world.
Yet super funds face the conundrum of managing short-term financial goals with long-term sustainability in a complex regulatory environment given their investment portfolios span many jurisdictions. They are well positioned to play a critical role in helping Australia meet its decarbonisation ambitions. But the scale of financing to meet net zero targets by 2030 requires involvement from these funds and other large investors.
The Federal Government aimed to address this with the release of the Sustainable Finance Strategy in 2023 that includes measures to support sustainable investment. It encompasses three pillars around disclosure requirements, building regulatory capability to crack down on greenwashing and support for the green bond market.
UN-Backed Principles for Responsible Investment (PRI) said earlier this year that a lack of regulatory support on stewardship prevented super funds from exerting more influence over ESG issues.
The other issue they face is insufficient investment opportunities in the energy transition in Australia. This has sparked debate about what constitutes a transition fuel and whether, for instance, gas can legitimately be in the mix despite being a fossil fuel.
Super funds manage ESG as a risk not a value
Steve Morgan, Principal at Automic group that delivers investor relations, accounting and ESG services to clients, believes super funds can embrace ESG in a way that does not derail their need to maximise retirement outcomes for members.
“ESG investing is a spectrum that ranges from the consideration of ESG factors (integration approach) as part of the investment process through to impact investment where positive social or environmental impact is an objective,” he says.
ESG considerations are managed over long-term time horizons as risks rather than as values, Morgan says. “The financial impact of many ESG risks is most pronounced over longer timeframes. Investors like super funds that invest for the medium to long term need to consider these risks and the impact on their portfolio,” he says. “This is not a values-based approach, it is a risk-based approach.”
The transition to a low carbon world is a “fundamental shift in the global economy with approximately 90% of global GDP committed to a net-zero”. “As with any change at scale, businesses need to adjust to changes in context and there will no doubt be winners and losers,” he says.
Origins of ESG investments difficult to trace
Gigi Foster, Professor with the School of Economics at the University of NSW, says fund managers have incentives to stay in business and generate profits to attract more members.
She questioned whether many members had the time or inclination to trace the origins of super fund investments given mandated sustainability disclosure requirements have yet to come into force.
Some of the global organisations they invest in have their tentacles in many markets and industries, some of which may be more ESG compliant than others.
“I don’t think that many customers have the spare energy, time, or even ability to trace whether or not a particular fund manager is actually choosing investments that actually protect or nurture the environment,” she says.
Those members that want to better understand the ESG credentials of super funds require a “nearly Herculean amount of effort to scrutinise the activities of all the companies” they invest in.
“Good luck to people who think they have the time to monitor all the myriad company activities that relate to environment stewardship, for all the companies they invest in,” Foster says.
Morgan disagrees. “There are super fund members who increasingly want to see their money invested responsibly,” he says. “A 25-year-old working today won’t access their superannuation for at least another 30 years. It will be 2054, and you have to think, what will the world look like then, how will ESG factors be shaping investor behaviour and what impact will these factors have on returns.”
