Responsible investment becomes mainstream in super

Responsible investment (RI) continues to become mainstream with just under half of all professionally managed assets in Australia now employing RI strategies, according to a new Responsible Investment Association Australasia (RIAA) survey.

The survey found that 81 per cent of the largest super funds have now embedded a formal commitment to RI –  up from 70 per cent in 2016. Almost all of these funds identify a formal process for reviewing this policy and 74 per cent explicitly state RI commitments in a standalone policy or in their investment beliefs.

The survey’s report says the changes are being driven by an ever-greater acceptance that environmental, social and corporate governance (ESG) factors are critical to consider as part of investment practice because they are increasingly affecting valuations and investment returns.

The changes are also being fuelled by the growing interest by Australians in whether their retirement savings are being invested in a responsible manner. Indeed, research conducted for RIAA in 2017 shows that nine in 10 Australians expect their super or other investments to be invested responsibly and ethically.

The report, Super Fund Responsible Investment Benchmark Report 2018, is based on a survey of the largest 48 superannuation funds in Australia, as well a handful of significant asset owners such as the two sovereign wealth funds in Australia and New Zealand. These 53 funds, in total, have an estimated $1.4 trillion in assets under management. The report builds on RIAA research published in November 2016.

The 2018 survey found that more super fund boards are now accountable for RI policies. The number of funds that have their full board, or board committees, oversee ESG risks and opportunities has grown 14 per cent from 2016 to 70 per cent.

It also reveals that 60 per cent of super funds have a least one negative screen across the whole of the fund, up from 34 per cent in 2016. The most popular exclusions are tobacco and armaments, followed by fossil fuels and human rights violations.

The trustees of 64 per cent of super funds now actively consider ESG, but just how they focus on climate risk varies.

More than half (55 per cent) of the super fund’s boards considered climate risk at least annually or on an ad hoc basis and as matters arise.

Only two funds (Australian Ethical and Christian Super) discussed climate risk at each board meeting as part of their ethics report. Some other funds (Cbus, Maritime Super and First State Super) considered climate risk during dedicated trustee sub-committee meetings quarterly or half-yearly.

Of concern, however, was that the boards of nearly one-third of Australia's largest super funds may not consider climate risk at all.

‘This could have both financial and regulatory implications, particularly in light of the recent explicit statements from Australian Prudential Regulation Authority that it considers climate change to be a foreseeable, and often-times material, financial risk issue and one that directors of institutional investors should consider with due care and diligence,’ the report notes.

While portfolio decarbonisation is on the radar, the survey found that only a handful of super funds have decarbonisation targets relating to their business and investment portfolios.

That said, super funds’ engagement with the companies they invest in is rising – 43 per cent were involved in direct company engagement, compared to 30 per cent in 2016. Nearly half of funds, however, do not disclose engagement activity or outcomes.

An impressive 94 per cent of super funds had a formal voting policy, compared to 58 per cent in 2016, and all but one of these funds made their policy public.

Of the 29 funds providing responses to how they voted in 2017/18, only three funds voted with the company board and/or proxy voting adviser on every occasion. In contrast, five funds voted independently of boards and proxy voting advisers on more than 10 per cent of votes.

The report notes that leading super funds can be traditional and ethical at the same time. ‘We are seeing an acceptance, and increasingly, an expectation, that super funds take a strong stance on activities within their portfolio companies that are harmful to humans, society and the environment – for example, companies involved in tobacco production or cluster bomb manufacturing – whether those funds are self-declared ethical funds or not.’

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