Rainmaker Information has identified 43 super funds in Australia that in 2022 either identify as ESG super funds, i.e., they are a signatory to an ESG protocol, they offer ESG investment options or they follow standard ESG practices.
These funds collectively managed $1.8 trillion, equivalent to 71% of the funds under management (FUM) overseen by the regulator APRA.
This is up 13% since 2021, from $1.6 trillion. The proportion of the market they cover has not changed.
Seventy percent of these funds are not for profit (NFP) funds, meaning they are either corporate, industry or public sector funds, with the remaining 30% being retail funds.
NFP funds dominate ESG market influence with respect to their FUM and account for 72% of the superannuation FUM overseen by ESG super funds. Of these 43 ESG super funds, seven do not offer ESG investment options. All of the funds that were ESG adherents but which did not offer ESG investment options were NFP funds.
This means that focusing solely on ESG investment options, when analysing the ESG super fund sector, underplays the role of ESG in superannuation.
Illustrating this, in some ESG super funds, specific ESG investment may hold only a median 1.1% of their FUM, but this does not reflect that in some ESG super funds all their investments are identified as ESG. Meanwhile in other ESG funds the funds uses ESG investment principles decisions across the entire portfolio, yet they may not offer a specific ESG investment option.
ESG super fund FUM is also very concentrated. The 10 biggest funds account for $1.2 trillion, being 67% of all ESG super fund FUM. This concentration is growing rapidly, in 2021 the biggest 10 ESG funds held only 62% of ESG coverage. Of these 10 largest ESG super funds, seven are NFP funds and three are retail funds.
Rainmaker Information’s analysis repeatedly found ESG super funds to deliver investment returns that are as robust as those delivered by regular super funds.
Firstly, through a comparison of Rainmaker’s Diversified ESG indexes of rolling 12‑month returns through the six-year period 2015-2021. It revealed no differences in investment outcomes for ESG investment options compared to other investment options. Reinforcing this, as at December 2021, while the ESG diversified index had delivered a five-year return of 8.6% p.a., the broad index had delivered a five-year return that was only marginally higher at 8.8% p.a.
Secondly, through analysis of the MySuper returns compared to the broad market that revealed that in the three and five-year periods up to December 2021 there is no discernible difference between the median returns for funds in Rainmaker’s ESG sample compared to the returns delivered by the broad market.
Over three years ESG super funds and the broad index both delivered 10.6% p.a. Over five years ESG super funds and the broad index both delivered 8.5% p.a.
Third, an assessment of which are Australia’s leading MySuper products reveals that measured by three-year returns, nine of the 10 top performing single strategy MySuper products are offered by ESG super funds. Measured by five-year returns, all of the 10 top performing single strategy MySuper products are offered by ESG superfunds.
It is unreasonable to argue that ESG super funds outperform simply because they follow ESG investment principles. But the key strategic point is that there is no evidence that investors into ESG super funds suffer any performance penalty at all. Indeed there is evidence to the contrary, namely that leading ESG super funds are indeed highly likely to outperform.
Almost all super funds disclose that they implement their ESG investment strategies through some type of investment screening. However, the nature of these screens and how they work is profoundly changing.
That is, in past years, ESG super funds were heavily focused on implementing a series of either positive and negative screens. But ESG investing tended to be negative, meaning funds placed great emphasis on their investment exclusions—investments they avoided such as investments into companies in the thermal coal, armaments, gambling or pornography sectors.
Reflecting this, in2021 Rainmaker found that while almost 90% of ESG super funds declared negative screens, only half declared positive screens. But a super fund can’t construct a portfolio based on what it won’t invest in, so it was inevitable this approach would evolve.
This is precisely what has happened. While almost all ESG funds still declare negative screens, the number of funds now putting heavy emphasis on positive screens increased dramatically, from 52% to 80%.
Crucially, the way ESG funds have done this is by applying the PRI SDG framework, a practice now explicitly followed by half the ESG super funds in Rainmaker’s 2022 sample. It’s quite likely many other ESG super funds do so too but haven’t yet explicitly articulated this position.
This principles-based SDG approach is highly practical because it enables super fund trustee boards to implement nuanced fiduciary-led and engagement-driven ESG investment decision making practices, rather than simplistically following tick-box divestment strategies.
When a super fund agrees to follow ESG investment principles and practices it implicitly agrees to step up its own accountability for how it makes investment decisions, monitors and manages itself. The process this triggers manifests itself through a range of public declarations and internal and public reports. The most often displayed examples of these among ESG super funds are that:
But as important as these ESG statements, reports and disclosures are, the manner in which many ESG super funds display these varies markedly. While the publication of such information does not make a fund ESG, if a fund declares itself to be ESG, these disclosures constitute proof points to help demonstrate these commitments.
Moreover, Rainmaker observes significant improvements since 2021 in the quality of these disclosures. That said, while these documents for some ESG super funds are produced to a high standard, are easy to read and—most crucially—are easy to find on super fund websites, this is not the case for all ESG super funds.
