Now that the banking Royal Commission has its terms of reference drafted to include superannuation, the team led by former High Court judge Kenneth Kayne has a golden opportunity. They can help align the $2.3 trillion sector’s investment mandate with what fund members actually want.
Investors expect a decent rate of financial return, that’s a given. But there’s also overwhelming evidence that members expect their super funds to invest in a sustainable and ethical manner, to the benefit of the community.
The opportunity arises because the commission’s terms of reference includes probing super funds use of members’ savings “for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members”.
Commentators and columnists have suggested that the purpose of this clause is to disrupt the flow of disguised payments from the industry super funds to affiliated unions and, in some cases, employer bodies. Ostensibly, this is in the guise of third-party director fees.
But the terms of reference are vague, allowing the commission to examine these massive funds’ “uses” in a much broader but meaningful sense. Don’t forget that royal commissions in the past have taken on a life of their own, such as the 1987 Fitzgerald corruption inquiry in Queensland that brought down the Bjelke Petersen government.
Under the ‘sole purpose test’ that has underpinned the superannuation system for decades, fund trustees need to ensure the investments provide for the retirement benefits of members. The tax office’s example of an investment that fails the test is collectables like art or wine that members can personally use.
In other words, they need to produce a commercial and arms-length return. But that needn’t stop members demanding that their funds also consider environmental and social costs and benefits.
It’s clear that’s where community sentiment lies. A vast majority of Australians expect their superannuation to be invested for values beyond financial returns. According to recent findings by the Responsible Investment Association Australasia (RIAA), 92% of Australians expect their super to be invested “responsibly and ethically.” The data comes from a survey of 1,037 Australian adults, performed in October by the well-regarded company Lonergan Research, so it is accurate to within 3%.
This is not just about funds divesting from businesses that have harmful pursuits such as burning fossil fuel or suppliers that abuse human rights. Of RIAA’s respondents, a chunky two thirds said they wanted their capital to be actively doing good rather than just avoiding harm.
We call this impact investing: anything from building clean energy systems or investing in affordable housing, healthcare or medical innovations.
As for financial returns, the arguments that ethical and impactful investing doesn’t cut it are old, tired, and disproved.
Take the RIAA’s 2017 Benchmark Report, which tracked the performance of responsible investments over most time periods. The report found the average responsible fund investing in Australian shares returned 7% over the most recent year and a healthy 13% per annum over the previous five years.
In comparison, the broader S&P/ASX300 accumulation index returned 11.6% over the five years.
On the same theme, the Global Impact Investing Network in 2016 surveyed 209 leading investors about their investments for measurable significant environmental or social benefits. This was a combination of very large institutional investors, family offices, foundations and wealthy individuals, with US$114 billion in impact investments under management.
The network found that a majority – 66% — were looking for market rate, risk adjusted financial returns, with another 18% looking for slightly under market rate returns. What’s more, 91% of all respondents’ impact investments performed in line with financial expectations, or outperformed. The impact performance was even better; only 2% were underperforming on environmental or social outcomes.
We believe that shrewd investors and the best companies will be positioning themselves to help solve environmental and social challenges.
It’s not just out of the goodness of their collective hearts: the challenges facing global communities are so great and so widely recognised that consumers are voting with their dollars. The best and brightest workers are also leaving irresponsible companies to join purpose-driven businesses.
If the Royal Commission does examine whether super funds are investing according to community expectations and in the best interests of their members, those standards must point towards ethical and impactful investing.
If not, the great news is that some super funds are already well down the ethical investing path.
HESTA, the fourth biggest industry fund covering health and community sector employees has established a long-running partnership with impact investing group Social Ventures Australia.
Australian Ethical has been investing, on behalf of clients, with an ethical charter that’s been consistent since 1986. They can now proudly claim that more than 35,000 Australians have super invested with the company.
Christian Super has become a global leader in impact investing and the fund has even spun out an advisory business called Brightlight to meet the demand for expertise.
The carbon-free Future Super fund has invested in new solar farms (and full disclosure: Future Super invests in a solar fund run by our company, Impact Investment Group).
At our own investor events, we’re getting ever more questions from people considering impact investing through their self-managed super funds.
Since World War II Australians have built a standard of living and amassed wealth unimaginable to the generation before. Our super funds now have about $2.3-trillion in assets under management – a pool of capital that could be crucial to the entire landscape of this country.
Nobody is suggesting we should compromise the paramount purpose of super – providing for retirement without ‘funny money’ investments. But let’s properly consider what retirement benefit is. We should ask what today’s investments mean for the world we are retiring into. If we don’t consider how to invest this wealth in a way that benefits our children, and their children, then who will?
This Royal Commission is happening because Australians have serious questions about our financial industries. Let’s use the conversation to get our superannuation investing in line with our expectations; to truly benefit people, the planet and our retirement.