As we saw in part two of our ethical super series, there are different ways your super can be invested and still be certified as ethical.
Ethical super is often promoted as being a means to exclude companies or industries you think are harmful. Some funds, however, will invest in contentious companies with a view to changing their behaviour as a shareholder.
In part three, we saw how some super funds offer options presented as "socially responsible" or "sustainable", but do not disclose what these options invest in.
These two points are important to keep in mind as we look into where ethical and socially responsible super is invested.
After the various scandals exposed at the banking royal commission, including people being sold insurance they could never claim on and being charged fees for financial advice they never received, people have come to question their investments in the banks. Australia's banking sector has also been criticised for its role in financing fossil fuel projects.
Many super funds invest heavily in big banks. Of the certified ethical funds, Christian Super and Local Government Super invest in all four of Australia's big banks and Australian Ethical invests in Westpac and National Australia Bank (NAB). Future Super has no shares in the big banks. For the certified ethical options, all invest in at least two of the big four.
While the ETFs may be promoted as responsible, ethical or sustainable, there are no strict rules on what companies they can invest in
This investment may be indirect. For example, some ethical and socially responsible options are invested solely in an exchange-traded fund (ETF). This allows the fund to gain a financial stake in a diverse portfolio of companies.
While the ETFs may be promoted as responsible, ethical or sustainable, there are no strict rules on what companies they can invest in. Many of these ETFs are heavily invested in big banks.
Zuper Super is one of a loose group of super funds who are not certified as ethical but promise a more values-based approach to super. Its Impact option has shares in BlackRock's iShares Core S&P/ASX200 ETF. This ETF's six biggest domestic holdings include Australia's big banks and the nation's biggest coal producer, BHP.
Members have to move into the 'Impact Plus' option to exclude this ETF and replace it with another, Russell Investment's Australia Responsible Investment. The latter does not invest in coal companies, but again it does invest in big banks; they make up four of its five largest holdings.
The Zuper Impact Plus has higher fees than Zuper Super. It's an example of a super fund offering members a way to have more impact on the environment through their super, but it comes at a cost.
Future Super also offers options they see as more impactful for higher fees. "We are really up-front with the differences between our product options and their different fees," says the fund's founder and director, Adam Verwey.
While we do have a lower fee index option, 85% of our members have chosen to prioritise having a bigger impact with their investment instead."
Many of the ethical or socially responsible options from different super funds are outsourced to AMP Capital, who have an ETF called the Capital Ethical Leaders Balanced Fund.
AMP Capital notes: "You may see some stocks on this list that, at first glance, appear at odds with our mission."
The holdings include all five of the Ethical Consumer's 'five unethical companies to avoid', namely Amazon, Coca-Cola, Walmart, Nestlé SA and Tesco. Ethical Consumer is a UK consumer magazine that has consulted for non-government organisations such as Amnesty International, Oxfam and World Wildlife Foundation.
AMP Capital did not address their investment in these specific companies when asked by Super Consumers Australia, but instead gave a general comment on its engagement strategy.
The ETF also invests in Aurizon, which some funds have criticised as it would not rule out supplying freighting services (beyond those it is legally obliged to provide) to the contentious Adani Carmichael mine.
AMP Capital makes two main arguments to explain why some of the companies its ETF invests in don't seem a good fit with an ethical leaders fund. Firstly, it claims it is "often faced with investing in the lesser of two evils, rather than simply between good and evil." To this end, it has invested in some companies that it believes are among the better firms in that particular industry in terms of their ESG practices.
AMP Capital did not address their investment in these specific companies when asked by Super Consumers Australia
Secondly, AMP Capital argues that "by securing a 'seat at the table' of these companies, we have an opportunity to lobby for and influence reform in their policies and practices."
These investments are badged as 'ethical' but it is difficult for people to know if these companies are already meeting ethical standards, or if a fund manager is hoping to make a company more ethical from within. AMP Capital told Super Consumers Australia its annual engagement report sets out "both the nature of and the companies involved in the main engagements throughout the year".
Accusations of human rights violations
Australian Ethical and Future Super both have holdings in glove manufacturer Ansell which the Human Rights Law Centre accused of human rights violations at its Sri Lanka factory. The ABC has also reported on complaints about the mistreatment of workers at Ansell and its supplier Top Glove.
Australian Ethical chief investment officer David Macri said the fund had looked into these claims and "concluded that Ansell had implemented measures to address and resolve the issues".
Future Super also addressed the allegations against Ansell, noting it engaged with the company through a provider of traded funds it works with. Ansell has since added stronger wording to its supplier agreement on human rights issues and increased auditing for its suppliers and manufacturing facilities.
Human Rights Law Centre legal director Keren Adams told Super Consumers Australia that the centre is not satisfied Ansell has changed its ways. "Ansell has subsequently been implicated in further scandals in relation to alleged labour rights violations," she said.
In October 2019, the US blocked shipments of gloves sold by Ansell over concerns that workers in its supply chain were being forced into labour.
"On the basis of these further revelations, we continue to have serious concerns about the company's human rights record," Adams said.
Ethical super and the fossil fuel industry
A recent poll of CHOICE readers found that 85% of respondents thought ethical super funds should not invest in fossil fuel companies.
Yet many socially responsible and sustainable options have substantial holdings in fossil fuel companies. Even some certified ethical funds are invested in a number of these companies.
Christian Super (one of the certified ethical funds), for instance, has holdings in a number of fossil fuel firms named in Market Forces' report Out of Line, Out of Time list as being incompatible with the goals of the Paris Agreement.
Many socially responsible and sustainable options have substantial holdings in fossil fuel companies
Companies considered 'out of line, out of time' by Market Forces that Christian Super invests in include APA Group, Beach Energy, Caltex Australia, Cooper Energy, Oil Search, Santos and Seven Group Holdings.
Perhaps surprisingly, Christian Super told Super Consumers Australia that it agrees with Market Forces' assessment.
"Our decision to exclude a company is based on a wide range of reasons and we have taken a decision not to divest at this point from the entire Market Forces list," the spokesperson said.
"This is a position that we regularly review … We advocate that all companies make steps to ensure that they work towards the Paris Agreement."
Christian Super also invests in all of Ethical Consumer's five unethical companies. Its approach to these investments gives some insight into how ethical funds approach the decision on whether to continue investing in, or divest from, contentious companies.
The fund told us it has placed Amazon and Nestlé on watch and will exclude them from its portfolio if they commit further breaches. It has also put Walmart and Coca-Cola on its "Grey List" and wants to exclude these companies.
The fund told us it has placed Amazon and Nestlé on watch and will exclude them from its portfolio if they commit further breaches
However, it has diversification caps in place which place some restrictions on what the fund will invest in and, in this case, that means that the companies stay, for now at least. "We have elected to exclude more egregious violators instead," a spokesperson for the fund says.
AMP Capital did not say whether it has any diversification caps for its ETF, but says, "The potential impact on predicted investment risk and return is assessed when considering any changes to the exclusions."
To understand why a fund would have a diversification cap in place, it is necessary to take a step back and look at portfolio theory. Investors (such as super funds) tend to guard against a single company or industry underperforming by holding a diverse portfolio made up of many companies across different industries.
Theoretically, the more industries a super fund takes off the table on ethical grounds, the less diverse its portfolio will be.
"Exclusion of investment in the fossil fuel industry reduces your risk-adjusted return," says Rand Low, honorary senior fellow at the University of Queensland's Business School.
Low explains that this is a matter of degree, however. "I would not say it results in significantly higher risks for fund members, as the fund should be well diversified in all other aspects."
Given that many ethical and socially responsible super options have significant holdings in fossil fuel companies and are pursuing an engagement approach, is engagement having results?
To answer this, you would need to know which companies the super fund is holding on an engagement basis. At the moment, this information can only be found by scouring the fund's voting records as shareholders. Coming to an informed view on whether the fund is voting in line with your values on each resolution would take extensive research.
Local Government Super
Local Government Super points to improvements in sustainability reporting and sustainable policies as a positive outcome of this process and gives the example of BHP.
"BHP is trying to be a leader in their industry on climate change risk management. You might think there is a lot more they could do, but there are some successes there," says Local Government Super chief investment officer Craig Turnbull. "I think engagement by super funds and many other bodies is slowly but surely having a positive impact."
Engagement by super funds and many other bodies is slowly but surely having a positive impactLocal Government Super chief investment officer Craig Turnbull
The last point touches on another layer of complexity here. There may be a number of parties advocating for change, including activists, media and those outside the shareholder system. If a company does make a change that these different parties are seeking, attributing the credit to a particular party or a particular strategy may be difficult, if not impossible.
In 2018, a survey by the RIAA found that 82% of Australian super funds were applying some kind of screening to companies involved in gambling.
But excluding gambling machines is complicated by the fact that supermarket conglomerate Woolworths is among the largest owners of pokies in the country, though it is reportedly planning to sell this arm of its business. Many super funds and options, including certified ethical fund Local Government Super and Australian Super's Socially Aware option, hold shares in the company.
The example of poker machines illustrates how difficult it is to have any certainty that none of your super is invested in companies and industries you want to avoid.
All funds are bound by law not to make misleading or deceptive statements about their product, which would include where they are investing. They do, however, have wide scope to generally present their super offerings as doing good or being responsible.
- Many super funds and options, including some certified as ethical, still have significant investments in fossil fuels. This may be because the funds are holding shares to effect change from within, but it is difficult to get clarity on how successful any attempts at engagement have been.
- Funds may also define exclusions differently, making it hard to be confident your money isn't going to an industry you want to avoid, and these differences also make it impossible to compare funds.
- Ethical super may be indirectly involved in an industry you want to exclude, for example through diversified businesses (like Woolworths owning poker machines) or by providing services (such as Aurizon potentially providing freight for the fossil fuel industry).
- To be certain what your fund or option is invested in, look at their portfolio holdings instead of relying on what may be vague statements about their aims or how they invest.
This is the fourth in a series on ethical super from Super Consumers Australia. In the next instalment, we will look at how ethical super funds and options are performing and how much they cost in fees.
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.