Nest eggs can be guilt free
Retiring with a clean conscience about how the money was made is possible, writes Claire Galea
RETIRING in comfort may be something most of us aim for, but retiring with a clear conscience may not be an obvious priority. If you think that multi- billion dollar corporations have a growing responsibility to consider such issues as the environment, the welfare of employees, the community and human rights in the way they conduct business, then you’re not alone — your super fund may feel the same way.
Investing in a responsible manner is rapidly becoming an important added dimension to retirement planning — for both the retail and institutional investor.
However, even with the best ethical investment intentions, the larger super funds are restricted in the way they invest. This is because super funds control 21 per cent of the Australian stock market. On any given day, they will own between 0.5 per cent to 2.0 per cent of every single one of the ASX 200 stocks.
The sheer size of some of the super funds and the endless pursuit of portfolio diversification means that ethical or socially responsible investment, SRI, of an entire super fund is often out of the question.
The ethical investment stance of avoiding certain types of sectors such as alcohol, mining, gambling, tobacco or armaments renders it impractical for a large super fund to adopt this type of approach.
For example, the resource sector constitutes such a considerable proportion of the Australian stock market, in terms of capitalisation, that any fund avoiding this sector runs a serious risk of underperforming the index.
Nonetheless, trustees of Australian super funds are coming under increasing pressure from the public and their fiduciary duties to take environmental, social and corporate governance factors into account in their investment strategies.
This issue is becoming perhaps the most important facing super funds.
In response, a number of super funds have made the decision to adopt a sustainable investment approach across their entire portfolio. A sustainable approach, rather than an ethical one, enables them to embrace ESG issues without having to exclude any sector.
There are now 22 super funds which have signed up to the UN’s Principles of Responsible Investment, which encourage investment managers and asset owners to take ESG factors into consideration when making investment decisions.
Three such signatories include UniSuper which has $ 24 billion under management, HESTA Super Fund which has $ 13.5 billion and the $ 6.5 billion Local Government Superannuation Scheme, LGSS, of NSW. Properties owned and managed by LGSS are required to use green power, and new or renewing tenants are also required in their lease to use green electricity.
Unusually, its share portfolio does apply an SR overlay which avoids investment in tobacco, uranium, old- growth logging and armaments for example, as well as any company which derives more than 10 per cent of earnings from these sectors. Additionally, it positively invests a proportion of the portfolio in the cleantech sector.
Chief executive officer Peter Lambert believes sustainability is the way to go.
Although you can’t take out a stock such as BHP, for example, because it constitutes such a large part of the index, we believe that you can have sustainability through the whole portfolio. In five to 10 years’ time we will all be doing it that way, and we will wonder why there was ever a debate about it. It will become mainstream and a fundamental part of research that companies do,’’ he said.
While these moves by the superannuation industry towards sustainable investment are encouraging, some may not consider them to be enough.
The Association of Superannuation Funds of Australia, ASFA, has more than 400 members, albeit not all are super funds, while the Australian Council of Super Fund Investors, ACSI, which was launched in 2001 to advise and educate companies on corporate governance issues, has 41 members.
On the other hand, the fact that only 22 Australian super funds have signed up to the UN PRI seems disappointingly low by comparison.
ASFA CEO Pauline Vamos points out that the transition of super funds to sustainable investing has to be done in a measured way.
It is a complex area. That is why the industry may be a bit slow on the uptake because it has to be done in a measured way. There is a real cost for an organisation to become green’; there is a 20 per cent additional cost on most things. So if you want to buy recycled paper or move into a green building you have to balance the cost today with your obligation to members.’’
For those investors for whom sustainability simply isn’t moving fast enough, some super funds do offer a less clinical and more moral’ approach that may be more aligned with your personal preferences.
Many super funds offer segregated SRI options which enable investors to screen out companies or sectors in which they don’t want to invest. So, if your super fund investing in British American Tobacco Tattersall makes you feel uneasy, then it may be time to vote with your feet.
The first step is to check if your super fund offers an SRI option which you can switch into or, if not, switch your super fund across to a provider that does.
Australian Ethical runs one of the few super funds which invests its entire portfolio, in this case over $ 300 million, in a socially responsible way — Christian Super ($ 500 million) and Hunter Hall International ($ 61 million) also claim to do so.
Detailed information on each of 25 super funds offering SRI options can be found from the Responsible Investment Association of Australasia’s Super Centre on its website. ASIC’s FIDO consumer website also contains information, and you can also check the UN PRI for the full list of super fund signatories.
Cost commitment: Pauline Vamos says the transition of super funds to sustainable investing has to be done in a measured way