Superannuation funds’ “ethical” investment behaviour

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.

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7 Responses to Superannuation funds’ “ethical” investment behaviour

  1. herodotus says:

    On the one hand we have those who defend AGL’s position and say that it is doing the right thing by looking after its shareholders, while on the other we have those who suggest that the national interest might be better served by energy being structured more sensibly and not left in the hands of companies dancing to ideologically inspired government tunes, subsidies and blandishments.

    We just saw the absurd Matt Thistlethwaite pronouncement on Credlin (Sky) that “companies are not investing” in fossil fuel powered plants because of “the market”, or because of “uncertainly”. Apart from the absurdity of saying that there’s a free market, we are unaccustomed to the ALP being trustworthy advisers on markets of a purely free and commercial nature. They are advisers on how to knobble companies and make them kowtow to union demands.

    Since many super funds are under union control it figures that (a) they will indulge in virtue signalling on whatever basis the media will support this year, and (b) that they will oppose any reforms which divert the rivers of gold that can be directed back to the unions to use in blatantly political advertising, or even given to crypto political parties of a similar feather, such as GetUp to do supportive campaigns.

  2. vr says:

    Then there is this paper on “sin stocks“.

    We provide evidence for the effects of social norms on markets by studying “sin” stocks – publicly-traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm to not fund operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, sin stocks are less held by certain institutions, such as pension plans (but not by mutual funds who are natural arbitrageurs), and less followed by analysts than other stocks. Consistent with them facing greater litigation risk and/or being neglected because of social norms, they outperform the market even after accounting for well-known return predictors. Corporate financing decisions and time-variation in norms for tobacco also indicate that norms affect stock prices. Finally, we gauge the relative importance of litigation risk versus neglect for returns. Sin stock returns are not systematically related to various proxies for litigation risk, but are weakly correlated to the demand for socially responsible investing, consistent with them being neglected.

  3. Tel says:

    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.

    I thought there was some economic theory that said if a small number of people switch from one investment to another, then it will generate sufficient incentive in the reverse direction such that other people will counterbalance and the nett effect is nothing much.

  4. Rusty of Qld says:

    For the financial year ending 30.6.2013 in LGIASUPER the Socially Responsible Australian Shares portfolio paid 30.39 %. This was at the tail end of the Rudd Gillard Rudd largesse being handed out, hasn’t been the same since.

  5. Nerblnob says:

    I hope returns on government-chosen energy technologies continue to be abysmal.
    There is nothing ethical about wasting your client’s money. Quite the opposite.

    It is disgustingly unethical to shift your customers money away from good returns to bad ones that benefit your ideological allies. It is corrupt.

    “fossil fuels” this would include coal and hydrocarbons (oil & gas to most people).

    Hydrocarbons are more than just fuels – investors who shun “fossil fuels” including oil and gas are doing themselves and the rest of the world a grave disservice.

    The hydrocarbons are the most broadly used organic compounds known, and are quite literally the driving force of western civilization.

    Since the 1940s, agricultural productivity has increased dramatically, due largely to the increased use of energy-intensive mechanization, fertilizers and pesticides.

  6. Dr Fred Lenin says:

    If we ever get a non leftoids government again and they destroy the climate scam and defund all the scams in place , how are the union mafia comrades going to explain to their members what happened to the members super when the cupboard is looted by the foreign carpetbaggers ? Hate to be in their shoes , ,Mussolini and ceascu spring to mind hanging from lampposts by the heels .

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