The debate ignited by the Productivity Commission over the effectiveness of superannuation funds as pension funds contains some enigmatic facets. One is that the funds themselves, especially the trade union dominated “Industry Funds”, tend to make their investment choices overwhelmingly at arms-length on the advice of professionals.
Many funds use the same advisers hence might be expected to have a similar portfolio. Moreover, in that respect, the work of the trustees is confined to selecting the optimally priced advisers. This may well be a good thing and might have implications regarding the proposal by the PC to have an expert selected list of 10 “best in show” funds as well as the alternative proposal by Peter Costello to have a national safety net government fund.
Funds seek to differentiate their competitive offerings in a number of ways. Investment funds, other than those adopting a highly conservative risk-averse approach, aim to beat the average value gain of the market, which is why they hire expert consultants. Some seek to focus on particular areas – technology, mining, infrastructure and so on. Others seek to exclude particular firms or types of firms on social grounds.
Conventional theory going back to H. M. Markowitz. (1952. The Journal of Finance, Portfolio Selection) is that the goal is risk reduction, which is achieved by diversification, and that departures from this by denying participation in any particular sector is likely to reduce returns.
That said, many, including Abidin and Gan have found in practice Socially Responsible Investment (SRI) fund performance is no better or worse than that of conventional funds. Sometimes the rationale for such investment filtering is however clearly ill-informed and Sinclair Davidson excoriated decisions to exclude mining companies with high reputations by the ANU superannuation fund here and here.
Most legitimately, exclusion of specific investment types occurs when a fund seeks to meet customers’ needs by marketing itself as avoiding particular types of investment. Thus the Energy Super Accumulation Industry Fund has a “social responsible fund” (with a relatively small take-up) that excludes investment in uranium, fossil fuels, pornography and some other products.
Most funds expressing such investment preferences may actually be engaging in virtue signalling in claiming to avoid investments in nuclear, fossil fuels, tobacco, pornography, labour exploitative businesses and so on. The extent to which the promoted policy approach is followed is unclear.
Of the top 20 superannuation fund performers over the past 5 years, twelve explicitly avoid making decisions based on Environmental and Social Risk (ESR) criteria. One top 20 fund, the ANZ’s Grow Wrap Super Private, even refuses to offer the government sanctioned MySuper plain vanilla product, seemingly because the product has an ESR tick box. Some others offer MySuper with mere lip service to ESR. Intrust Core Super (hospitality) unambiguously says that labour standards and ESR and ethical matters are not relevant to its investment decisions.
Most of the top 20 funds expressing support for non-financial goals in their investment portfolio, like Telstra Corporate Plus, simply say they have a “Preference for investments with good ESG credentials provided there is no compromise on expected risk-adjusted returns for the portfolio”.
For its part, UniSuper makes some absurd statements about the world running out of oil and food but says the market prices already recognise these factors so it will not deviate from economic criteria and adds, “Meanwhile, the threat of global warming has attracted many billions of dollars into clean technology companies (wind farms, biofuels etc.) but the returns in many cases have been abysmal.”
Only one of the top 20, VicSuper Future Saver, is a full blooded avoider of investment in firms involved in fossil fuels and activities said to be causing social harm. Others in the top 20 claiming to be active pursuers of social goals are less categorical:
- HOSTPLUS (hospitality), which actually has the best earning record, believes in addressing climate change but not in “full divestment from the fossil fuel industry”.
- Cbus Growth (building) talks about “climate change risks and opportunities” and “an orderly and just transition to a climate resilient economy” but it is unclear how that affects investment choices.
- CareSuper (medical) claims climate change is a major investment criteria and tobacco is avoided.
- AustralianSuper only avoids tobacco as an investment.
- Equip Rio Tinto claims it takes ESG factors, including climate change, into account
- BUSSQ My Super says it takes account of labour standards, environmental, social and ethical considerations but primarily is guided by economic investment objectives
It is not easy, by examining investment returns and funds’ actions, to assess whether the ESR additions to economic criteria have been beneficial or harmful to superannuants. Some might point to the prominence of successful funds claiming to follow ESR guidelines as evidence that this can be economically beneficial as well as ethically noble.
However, seldom are funds’ departures from pure economic criteria explicit and their actual consequences specified –the hapless ANU Vice Chancellor did attempt such a course and his decisions were ridiculed. If ESR investment criteria are intended to offer customers a better choice they should be prominent and the outcomes made public. To the extent that they are not indicates an unwarranted condescension on the part of the trustees.