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Ethical super: Will your nest egg be better off?

We take a look at the performance of ethical funds and options.

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Last updated: 27 October 2020
Fact-checked

Fact-checked

Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • One ethical fund recently moved into the top quartile of funds for long-term performance
  • Fees for ethical funds and options may be substantially higher than their mainstream counterparts
  • Claims that ethical super or responsible investments outperform their peers should be examined closely

In a recent poll of CHOICE readers, seven in 10 respondents said that maximising returns was the priority for their retirement savings, ahead of investing ethically. 

Although you don’t necessarily have to choose between one or the other, it's important to get a full picture of how ethical funds and options are performing so you can make an informed choice about who manages your super. 

Ethical super fund performance

The Responsible Investment Association Australasia (RIAA), the accreditor of ethical investments, has certified only four funds as ethical on a whole-of-fund basis. Of these, Australian Ethical had the best performance over the past five years. The certified funds can be found through RIAA's Responsible Returns tool.

In the fund-wide figures reported to the Australian Prudential Regulatory Authority (APRA), only Australian Ethical (ranked six of the 146 funds listed) was in the top quarter of funds for five-year returns. Local Government Super was ranked 48 with Christian Super at 78 and Future Super at 122. Future Super didn't respond to an enquiry from Super Consumers Australia about its performance.

These figures need to be approached with some caution. They are fund-wide, so the performance of the specific option your super is invested in may be quite different from that of the fund as a whole. 

A high-performing option can lift the fund-wide figure, but you need to have your super invested in that option to benefit from its performance.

A high-performing option can lift the fund-wide figure, but you need to have your super invested in that option to benefit from its performance

Another complication when comparing certified ethical funds is that not all investment options are created equal. Some are what are known as 'single strategy', meaning they have one investment strategy no matter your age. Australian Ethical and Christian Super take this path for their default 'MySuper' investment. 

Others take a 'lifecycle' approach, meaning the investment strategy changes as you age. Lifecycle investments tend to become more conservative (or decrease in risk), the trade-off being potentially lower returns as you get closer to retirement. Local Government Super has invested its 'MySuper' option this way.

Future Super does not have a MySuper product – members have to choose to join the fund.

The following table shows the five-year net returns of the three certified ethical funds with MySuper products. Australian Ethical has moved into the top quarter of funds after recent improvements in performance. Christian Super remains below the median.

5-year net returns of ethical MySuper funds
Certified ethical super fund with MySuper product 5-year net return rank (of 76)
Australian Ethical 11th
Local Government Super 44th
Christian Super 64th  

Ethical super fund fees

Aside from how your super fund performs, fees are a very important factor in the size of your retirement savings.

Funds charge fees for managing your super that may seem minor, but over time they can have a substantial impact on your retirement savings. The Productivity Commission found that even a seemingly insignificant 0.5% difference in fees can cost a typical person in full-time work $100,000 by retirement age.

The graphic below shows how the certified ethical funds stack up on fees for their MySuper products against the median fee. 

Fees for managing your super may seem minor, but over time can have a substantial impact on your retirement savings

Australian Ethical chief investment officer, David Macri, tells Super Consumers Australia that fees are important, but says the fund is focused "on delivering value to our members through superior risk-adjusted performance after fees".

Macri also notes the fund had lowered its fees over time and planned to continue cutting fees as more members join.

What does the APRA heat map reveal?

APRA recently released a 'heat map' which rates funds from white to dark red on a number of criteria, including fees. 

Products that are performing above a benchmark set by APRA are coloured white. 

Products that fall below the benchmark are coloured on a continuum from pale yellow to dark red.

APRA heat map
Fund Total fees disclosed on $10,000 balance Total fees disclosed on $50,000 balance
Australian Ethical Orange Yellow
Christian Super Yellow Red
Local Government Super Yellow Orange

Sustainable options in mainstream funds performance

Another way to invest in line with your values is to stay with a mainstream fund but move your super, or some of it, into a sustainable investment option offered by the fund. 

As we saw in part 3 of this series, some funds offer these options but don't disclose what they invest in, so there can be questions over the 'socially responsible' and 'sustainable' claims they make.

When a mainstream fund offers a socially responsible product alongside its balanced product, the performance is generally better for the balanced product

Some of the larger funds argue they can offer members more value than certified ethical funds. A spokesperson for Australian Super tells us that "AustralianSuper's size and scale enables the fund to actively steward our capital and use our influence to achieve better environmental, social and governance (ESG) outcomes and create long-term value for members."

Some of these options have performed well. However, the general trend is that when a mainstream fund offers a socially responsible product alongside its balanced product, the performance is better for the balanced product. 

This table shows the performance of default options compared with socially responsible options over a five-year period. Note: it isn't possible to do a strict 'apples for apples' comparison as the socially responsible options may have different risk levels.

Default compared to socially responsible options over 5 years
Super fund  Default option
5-year crediting rate
(to 30 June 2020)
Socially responsible option
5-year crediting rate
(to 30 June 2020)
Australian Super 7.35% 6.10%
Care Super 6.59% 6.69%
Aware Super (formerly First State Super) [growth stage] 6.57% 5.89% (Australian Equities socially responsible investment)
5.4% (Diversified socially responsible investment)
Hesta 6.27% 8.61%
Sunsuper (Balanced Pool) 6.45% 5.07%
WASuper 5.49% 6.90%

Note: these returns are after deduction of fees and taxes, except for Aware Super, which is before deduction of administrative fees. For the lifecycle funds, the main stage was used.

Superannuation researchers. Super Ratings, previously concluded that sustainable options (as a whole) don't perform as well as balanced options, although some individual sustainable options did do well.

For example, Hesta's Eco Pool easily outperforms the fund's core balanced option (Core Pool), but this option is heavily weighted towards shares and is an exception to the rule. But as we'll see in the next section, fees are also higher for this option than for Hesta's default option. 

Hesta did not respond to our question about why the Eco Pool option costs more.

Sustainable options in mainstream funds fees

In some funds, fees are much higher for the options badged as socially responsible. One explanation may be the extra resources a super fund spends on researching and analysing the investments to determine if they pass the various ethical tests. 

Socially responsible fees compared to default fees
Super fund Default fees on $50k
(growth stage for lifecycle)
Socially responsible fees on $50k
(as of August 2020)
Australian Super  $387  $477
Care Super  $583  $558
Aware (formerly First State Super) [growth stage]  $527  $252 (Australian equities socially responsible investment)
 $382 (Diversified socially responsible investment)
Hesta (Eco Pool)  $520  $600
Legal Super  $628  $953
LGIA Super  $568  $763
Sunsuper (Balanced Pool)  $446–453  $703
Unisuper  $351  $336 (Global Environment Opportunities)
     $282 (Sustained Balanced)
     $306 (Sustainable High Growth)
 WA Super  $513  $645

Note: rounded to nearest dollar

In theory at least, a super fund could offer lower fees on a socially responsible option by outsourcing its socially responsible option to a passively managed ETF. 

In some funds, the socially responsible options actually charge lower fees. A spokesperson for UniSuper told us that the fund's three socially responsible options use listed investments and mostly internal fund managers so that it can offer a low-fee product.

In contrast, Australian Super says the higher fee for its socially aware option "is a result of two drivers: the investment objectives of the option, and the investment managers selected".

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Fees can have a substantial impact on your retirement savings.

Can ethical investments outperform other investments?

You may have seen headlines that responsible investment funds have outperformed mainstream funds across a range of different time frames and asset classes. These stories are picking up on work done by the RIAA.

But this research compares share portfolios, not super funds.

Comparing a share portfolio with a super fund isn't an 'apples with apples' comparison. Super funds are designed to maximise your retirement savings, so invest in a range of assets, including individual shares, fixed-interest options, unlisted property, hedge funds, infrastructure and cash.

A share portfolio, on the other hand, is invested only in shares. And, unlike a super fund, it generally isn't designed to meet the holistic retirement goals of investors, being more of a high-risk/high-return strategy.

A share portfolio is invested only in shares and, unlike a super fund, generally isn't designed to meet the holistic retirement goals of investors

The RIAA has also claimed that super funds that invest responsibly outperform their peers.

But it's important to point out here that certified 'ethical funds' and 'responsible investment funds' are not the same thing.

The 'responsible investment' funds include a number of large mainstream funds, including Australian Super, Care, First State (now Aware Super), Hesta, Cbus and Unisuper, as well as the certified ethical funds. 

The group of 'responsible investment' funds is actually much larger than the group of 'non-responsible investment' funds.

Cbus has a responsible investment policy in place that informs how all options invest

The example of Cbus illustrates how a fund doesn't necessarily have to offer a certified ethical option, or even an option badged as socially responsible or sustainable, to be considered a responsible investor. The fund has a responsible investment policy in place that informs how all options invest.

This RIAA research also includes Australia's Future Fund as one of the responsible funds. But this is a sovereign wealth fund that specifically describes itself as "not a superannuation fund" and isn't open for investment from members of the public.  

So, what can we make of these findings? First, they highlight the overlapping and often confusing terminology used in this area. Second, they show that some mainstream funds are embracing environmental, social and governance criteria, but aren't certified as ethical funds.

We care about accuracy. See something that's not quite right in this article? Let us know or read more about fact checking at CHOICE.

This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.