Updated: Jul 3
Many of us understand the ethics of fast fashion and fair trade tea, but how often have we stepped back and thought about where our super is being invested? Likely, never.
Superannuation can be a daunting topic — the simplest option is often to leave it with our employer. Set it once and let it become a case of out of sight out of mind. If this sounds like you, you’re not alone (have a look here to learn the basics). A report from the Australian Government in 2018 found that only 1 in 10 Australian's had a very good understanding of where their funds were being invested and up to 30% of members had no understanding of the different investment options available to them.
Source: Superannuation: Assessing Efficiency and Competitiveness, Productivity Commission - Australian Government, 2018
So why is this a problem?
Your super is being poured into investments that have real-world impacts, and most of us don’t know where our money is going. So why should we be worried?
Super funds are notoriously bad at cleaning up their act. One study done by Market Forces found that 82% of Australian super funds are at risk of legal action over climate failure. Every year, hundreds of millions of dollars are being poured into some of Australia’s dirtiest companies. Without paying close attention, this can be a detriment to ourselves, society, and our environment.
This article is a simple guide to finding sustainable super options and ensuring your retirement plan contributes towards a sustainable, cleaner, and safer future.
So what is “sustainable” super?
Sustainable super means that your money is being invested with an explicit focus on the consequences of that investment. This means each investment is generally screened with environmental, social, and governance lenses. This is also referred to as ESG investing, where the Superannuation investment team considers the social, environmental, and governance credentials of a company they select in their portfolio. Avoiding investment into fossil fuels (coal, oil, and gas), weapons, tobacco, logging, animal cruelty, and companies that are implicated in human rights abuses and worker exploitation. Examples of sustainable investments include renewable energy, recycling, education, hospitals, and aged care.
How can I navigate the different options and make a choice?
Research. Research. Research. It’s critical to put aside some time to thoroughly research your options and understand which super works best for you. Below are several tips to navigate your research.
Check out comparison sites. Canstar, Chant West, Morningstar, RateCity, SelectingSuper are useful platforms that can guide you in your research. However, whilst comparison websites can be useful, they are businesses and may make money through promoted links. They may not cover all your options and might promote some super funds who pay to be featured - take any ranking with a grain of salt!
Thoroughly read through the terms and conditions of different super funds. Look at their website and find their “PDS”. A PDS is a Product Disclosure Statement, in which the superannuation will detail the benefits, risks, and investment strategy of the super fund. The PDS also lists the risk level of the fund, the recommended investment timeframe, and most importantly the fees and costs! Here are several questions to keep in mind:
-Does the super fund have competitive fees?
-Does the superannuation fund have a good selection of sustainable investment options?
-Does the superannuation fund have a good long-term track record?
-What other services does the superannuation fund offer?
3. Talk to a financial advisor. An advisor can help pick apart the essential details of different super funds tailored to fit your circumstances. If ethical investing is important to you can look at this list.
4. Read the"MoneySmart" guide, which is a very helpful and non-biased government resource worth checking out. It provides useful tips and guides to choosing the right super, tax implications, and a superannuation calculator.
Navigate fees and performance
Understanding fees and performance can be complex. Unfortunately, there’s no cookie-cutter formula to determine the “best” option. But as a starting point, you can compare the “cost of the product” by looking at the fund’s PDS. Most super funds will give you the cost in dollar value for a balance of $50,000. It’s important to know your risk appetite and your financial goals to find a super fund that works with your needs. Use this exercise to figure out your risk profile and retirement goals.
How do fees for “sustainable” super compare to the industry standard?
The Australian Tax Office has launched a YourSuper comparison site which shows 80 MySuper products and ranks them accordingly. The site also shows the differences between the best and worst products, in terms of both fees and investment performance. The full list will become available from 1st July 2022.
The worst five funds all delivered returns of less than 5.5 per cent per annum over a six-year period. Conversely, the top five products for investment returns are all managed by industry funds, led by Australia’s largest fund AustralianSuper which returned 8.1 per cent to members. Equaling top spot was Hostplus, which also returned 8.1 per cent.
On the other end of the scale, the likes of ASGARD Independence Plan, BT Super, AON Master Trust Westpac Group and Commonwealth Essential Super had the lowest returns.
However, it should be highlighted these are pure returns and do not take into calculation risk, insurance in the fund and other investment options.
When it came to fees, the likes of QSuper, Super Direction Fund, Bendigo Superannuation Plan, Uni Super and AMG Super are charging members the least per year.
While members of Mercer Super, Qantas Superannuation, MyLife My Money Superannuation, Public Sector Superannuation and Australian Defence Force Superannuation Scheme were paying the most in fees.
We think the best way to compare fees is to look at the cost of the product for your balance amount, but also consider the performance overtime over the last five years if possible, otherwise per annum.
When comparing fees, also ensure to compare apples with apples. For example, only compare a growth option with another growth option, and try to use the same period.
A 2019 Rainmaker Information super fund fee study analysed fees charged by more than 500 superannuation funds and 50 self-managed super fund administrators. The study found fund members are now paying 1.1% in fees on average. However - fees are not the whole picture.
If you care about aligning your money with your values - you should also consider the ethical screening process (if there is one), the investment process, the range of investment options, transparency (can you see what you’re invested in? A lot of Super funds still do not disclose their investments!).
Finally, keep in mind that some ethical superannuation funds do advocacy work on your behalf, meaning they influence companies and their impact. For example, Verve Super only invests in companies that have at least one female member on their board. That’s the type of future we want! They also have services to support women, for example, they do not charge an annual admin fee if a member's account balance is lower than $5,000. Members can also apply for the annual admin fee to be refunded for a period of up to 12 months after becoming a new parent.
As a recap when looking at how ethical superannuation fees compare, we have designed this handy guide based on information provided by MoneySmart:
Does ethical and/or sustainable super mean lower returns?
Ethical funds can sometimes have higher fees, but can it be justified for more sustainable and higher returns? There is typically a cost associated with investing ethically, as undertaking the screening of ethical companies is an additional cost, but this screening often leads to better performance.
A recent meta-study (is a MEGA study, compiling 1,000 research findings) ‘Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020’ done by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management, found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital.
They drew six conclusions about the relationship between ESG (an investment being ethical) and financial performance after examining the 1,000+ individual studies:
Improved financial performance due to ESG is becoming more marked over longer time horizons.
ESG integration, broadly speaking as an investment strategy, seems to perform better than negative screening approaches
ESG investing appears to provide downside protection, especially during a social or economic crisis.
Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
Studies indicate that managing for a low carbon future improves financial performance
ESG disclosure on its own does not drive financial performance.
As your retirement is a long-term investment, an ESG focus can therefore be a winning strategy to access better returns!
Sustainable Super takes climate risk seriously
From an environmental perspective, Climate Change is a financial risk our Super Funds need to manage. In April 2021, the regulating body for banks, insurers, and superannuation trustees (APRA) released its first warning: financial institutions now need to manage the financial risks of climate change.
Beyond the existential threat, Climate change is now recognised as a serious economic threat too:
"Climate change is a systemic threat that left unchecked will undercut Australian economic growth and long-term investment returns," said Erwin Jackson, director of policy at the Investor Group on Climate Change (IGCC).
By choosing a sustainable super fund, you ensure that climate change has been seriously taken into account by the investment team. For a full step-by-step process taking into account your objectives and situation, check out the three-step money guide by Verve Super.
Which super fund actively invests in renewable energy?
What if you'd like your super to make a positive impact, and actively fight the climate crisis? You need to know that there are two categories of sustainable super funds:
1-Super funds with sustainable super products, using only a broad negative screening process (removing problematic industries and companies)
2-Super funds whereby sustainability is embedded in their core investment thesis.
Super funds with sustainable super products (non-exhaustive list, just a few examples)
2. Super funds whereby sustainability is embedded into their company mission (non-exhaustive list, just a few examples):
For further information, Market Forces have created a brilliant table that compares how super funds are positioned when it comes to climate action and tells you if your super invests in oil, gas, and coal and whether it votes in favour of climate-related shareholder resolutions.
How much impact can you make with your super?
The impact you can make by switching your super can be even more powerful than anticipated. Future Super has found that in 2019, the impact of 15,000 Future Super members avoiding 62,000t CO2 emissions by investing in impact super funds is the same as:
Over 35,000 people deciding to holiday locally than a return flight overseas
Nearly 60,000 people deciding to start eating a plant-based diet
Taking about 27,500 cars on Australian roads
In 2020, Future Super did a deeper carbon analysis to map the impact Super can have on individual carbon emissions. They found that almost one-third of the carbon footprint of the average person living relates to their investments (which includes super)!
While individual eco-actions are still important, being impactful can become a lot simpler, and a lot more effective by switching you super!
By 2030, Superannuation funds are set to own more than half of the Australian Stock Exchange, a true indication of how influential your investments are in shaping an ethical future.
If you want to learn more about sustainable super, join the Bloom community. We have an upcoming array of events where YOU can learn how to make a positive impact on your finances. You can re-watch our webinar with Future Super here.
⚠️ Please note this is not financial advice, but simply educational content to learn more about sustainable finance and superannuation. You should always do your own research and seek professional financial advice to check how this information relates to your unique circumstances.