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ESG options performance questioned: why that’s a good thing
It may be unpalatable to hear, but, at least within the investment options of profit-for-member super funds, so-called ‘sustainable’ investment funds don’t do as well as your plain vanilla balanced-type options. Fees are an issue and returns are lower, according to new SuperRatings research.
The results of a SuperRatings study on the subject were published last week. The study, it should be emphasised, comes with lots of caveats. The results in no way question the importance for super funds, and any other investors, to incorporate ESG thinking and processes. Most, if not all, big super funds include ESG principles and processes within their investment strategies.
To a certain extent, the fact that SuperRatings is happy to publish the results of this research is a good thing. It shows that the ESG trend is real, is here and is not going away. It therefore should be examined alongside all other investment trends – without bias. Big super funds make up a big proportion of SuperRatings revenue, either directly or indirectly.
The SuperRatings research reveals that the median performance of ‘sustainable’ investment funds is lower than the median performance of the SuperRatings SR50 Balanced (60-76) Index, comprised of traditional balanced super funds. Furthermore, the ‘sustainable’ funds have higher median fees. The combination of the two means a sizeable number of ‘sustainable’ funds produce sub-optimal returns at relatively high fee levels. ‘Sustainable’ funds include funds that select their investments based on environmental, social and governance (ESG) factors.
However, there are a number of ‘sustainable’ funds that outperform the market, while some also have lower fees than many Balanced options. Of the top-returning super funds that are classified as sustainable due to the fund’s incorporation of ESG and socially responsible investing criteria, HESTA’s ‘Eco Pool’ balanced option has delivered the top return over 10 years of 11.1 per cent a year, which is considerably higher than the SR50 Balanced (60-76) Index return of 8.9 per cent.. Close behind are VicSuper’s option, with 10,3 per cent over 10 years, AustralianSuper with 10.0 per cent, WA Super with 9.5 per cent and UniSuper with 9.3 per cent.
Kirby Rappell, SuperRatings executive director, says there is a range of factors that must be taken into account when assessing the extent to which ESG factors affect a fund’s investment decisions, as well as the cost involved. “For example, some funds may apply a simple screen on certain industries, while others may conduct more in-depth analysis on individual businesses, which may justify a higher fee. This makes it difficult to provide a definitive ranking of sustainable fund performance,” he says.
“When considering sustainable alternatives, it is important to look at each individual fund’s mandate, their process for investing sustainably, and of course the industries and businesses they do and do not invest in.
“When we speak to financial advisers, they tell us that ESG factors are becoming more and more important for their clients. Advisers need the capability to examine and compare sustainable funds to ensure that the product is the best fit for their client both in terms of their risk and return preferences, as well as their social and environmental values.”
– G.B.
