Rainmaker reveals Australia's most ESG superannuation funds

Superannuation funds that follow environmental, social and governance (ESG) principles collectively manage over $1.6 trillion. This is equivalent to 71% of the superannuation savings overseen by the superannuation regulator, APRA.

This makes Australia's ESG superannuation coverage ratio among the highest in the world.

In recognising the growing commitment towards ESG investing by super funds, which may also be referred to as sustainable, responsible, or ethical investing, Rainmaker Information has released the findings of its inaugural ESG Superannuation Taxonomy Study as part of its latest Superannuation Benchmarking Report.

"The purpose of the study was to explore what it actually means to be an ESG super fund," said Alex Dunnin, Rainmaker's director research.

"With so many people talking about ESG and so many super funds and investment managers claiming to be ESG proponents, it's important for investors that we develop markers of what this actually means. When people are looking to join an ESG super fund, we want to help them know what to look for," he said.

In developing the research to support the study, Rainmaker created a framework that captures what it is about ESG super funds that makes them different. Assembling these markers in-turn enabled Rainmaker to acknowledge which super funds display the most of these ESG proof points.

These proof points include which funds declare themselves to be committed to ESG principles, publicly state their values, are affiliated with which ESG protocol groups, disclose their portfolio holdings, proxy voting policies as well as voting records, declare their investment screens (the criteria they use when making investment decisions) and report their ESG, climate change and social impacts and carbon footprints.

In conducting this research, Rainmaker found:

• There are 60 super funds that Rainmaker identifies as being an ESG super fund (approximately one-third of all super funds)
• These funds manage a combined $1.6 trillion, equivalent to 71% of all the superannuation assets overseen by the regulator APRA.
• Only two-thirds of ESG super funds offer specific ESG investment options.
• Not-for-profit (NFP) funds dominate the ESG superannuation space, with over 70% of the ESG funds being from the NFP segment.
• There are almost 50 ESG protocol groups to which ESG super funds may be signatories.
• While only one-third of all super funds disclose their portfolio holdings, 75% of ESG super funds practice at least some form of portfolio holdings disclosure.
• While 90% of ESG super funds disclose the shares into which they invest the most, less than half disclose the specific properties into which they invest and only one-third disclose their bond holdings.
• 90% of ESG super funds disclose their investment screens. These investment screens are heavily tilted towards negative screens, that is, the types of investments funds exclude rather than what they seek to include.
• Two-thirds of ESG super funds publish their Annual General Meeting proxy voting policies.

"While ESG investment principles are incredibly important, they do not override the super fund trustees' fundamental obligation to maximise their fund members' best interests by achieving the highest investment returns they can."

"Super funds should adopt ESG principles because it makes them better super funds. Super fund trustees must always focus on the financial best interests of their members," he added.

The report states that one of the most fundamental tenants of being an ESG super fund is that the fund trustees must be transparent about what their fund invests in.

"If a fund doesn't disclose its investments, how can a fund member know the fund is true to its word?" asked Dunnin.

"ESG super funds also have to accept they will pay a price for this transparency. They may be criticised, sometimes extremely viciously, by their fund members or by activist groups because of what they invest in.

"But ESG super funds should wear this criticism as a badge of honour because they are being criticised for being open and honest. This is a core point of being an ESG super fund," said Dunnin.

"While it is reasonable for activist groups to criticise ESG super funds for what they may invest in, these groups should also criticise super funds that don't disclose their investments," he added.

"While the impacts on the climate is a significant aspect in ESG investing, there are many other factors for funds to consider. Trustees of ESG super funds have to weigh up how they wish to impact the market and the companies with which they are engaging."

Rainmaker's ESG Superannuation Taxonomy Study revealed Australia's top ESG super funds that scored the highest in their inaugural study to be: