Need to know
- ASIC has recently fined some super funds for 'greenwashing', or exaggerating their green credentials
- Many super funds have embraced ESG (environmental, social and governance) considerations in making decisions about how they invest
- Super Consumers Australia says calls to create exemptions for the super fund performance test are bad policy
What is ESG?
As more Australians have become interested in how super funds invest their money, more funds have embraced ESG (environmental, social and governance) considerations in their investment choices.
The basic idea with ESG is that companies that are harming the environment are bad for the community, and may also be likely to run into legal trouble and carry more risk for investors.
On the other hand, companies that are environmentally sustainable, are managed well and do good for the community are more likely to be strong long-term investments.
See our guide to strategies for ethical super investing for more information.
What is greenwashing?
With more and more consumers becoming interested in buying products and services that align with their environmental goals, there is a commercial incentive for businesses to present themselves as 'green'.
ASIC defines greenwashing as 'the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical'
The super industry regulator, the Australian Securities Investment Commission (ASIC), has highlighted greenwashing as one of its current priorities, and defines greenwashing as "the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical."
Case study 1: Vanguard Investments
In December 2022, ASIC fined Vanguard Investments Australia $39,960 after the regulator accused it of engaging in greenwashing regarding some of its funds.
A Vanguard product disclosure statement said one of its index funds excluded shares of companies involved in the "production, manufacture or significant sales of tobacco." ASIC noted, however, that the fund did invest in some companies that were involved in selling tobacco products.
Case study 2: Cruelty-Free Super
The same month, ASIC fined Diversa, the trustees behind Cruelty-Free Super (CFS), the sum of $13,320.
ASIC was concerned that CFS's website overstated their screening process. CFS claimed to not invest in companies involved in "polluting and carbon intensive activities", "financing or support of activities which cause environmental and social harm" and "poor corporate governance".
While the fund did exclude some companies from its portfolio, ASIC alleged the way it filtered out companies was more specific than its website claimed.
ASIC Deputy Chair Sarah Court said the regulator wants super funds to ensure they have evidence to back any ethical claims they make.
Case study 3: ASIC action against Mercer Super
In February 2023, the regulator took its first court action for alleged greenwashing against Mercer Superannuation (Australia).
Court said Mercer's action was "of an alleged nature that didn't warrant an infringement notice but warranted being in the courts, and that that was what investors would expect."
ASIC alleged the company had made misleading statements about seven 'Sustainable Plus' investment options. Marketing text said these options didn't invest in companies involved in gambling, alcohol production or carbon-intensive fossil fuels like thermal coal.
If financial products make sustainable investment claims to investors and potential investors, they need to reflect the true positionASIC deputy chair Sarah Court
Despite these claims, ASIC alleges the Sustainable Plus options invested in 19 companies involved in gambling, 15 companies involved in alcohol production and 15 companies involved in extracting or selling carbon-intensive fossil fuels.
"If financial products make sustainable investment claims to investors and potential investors, they need to reflect the true position," said Court.
Is ESG Working?
The boundaries of ESG are difficult to define. Different investors can have very different priorities and values.
As we've seen in our previous series on ethical super, funds have wide discretion to decide which investments they view as ethical and whether or not they'll divest from, or engage with, companies they view as socially damaging.
In some cases, it may be in a fund's interest to adopt a generous definition of what constitutes an ESG-friendly investment
It can also be hard to gauge how much a fund invests in companies doing good for the environment or society. In some cases, it may be in a fund's interest to adopt a generous definition of what constitutes an ESG-friendly investment, or to emphasise their socially responsible investments even when these may be a small part of their portfolio.
ESG ratings could help investors understand climate-related risk
Climate change can bring risks for companies. By extension, these risks can impact anyone who invests in them.
Examples of climate-related risk could include physical risks – for instance, a company may find it harder to make a profit if droughts impact their supply chain or if fires are more likely to damage their property. Companies may also face 'transition risk' where the shift to a less carbon-intensive economy may hurt their business.
The government recently asked for feedback on how financial companies should have to communicate these kinds of climate change-related risks to investors.
"This consultation is an opportunity to start defining ESG, and give companies guidance on how they can be more accountable on climate-related risk," says Xavier O'Halloran, director of Super Consumers Australia.
Does ESG help or hurt returns?
Whether choosing investments through an ESG lens improves investment returns is up for debate. Some studies suggest it helps rather than hinders performance. In the last financial year, however, funds without an ESG focus may have done better as the energy sector of the ASX200 far outperformed other sectors and the broader market. Analysis found that ethical options in growth super funds averaged a -4.92% return for the 2021–22 financial year, underperforming the broader growth category by 0.64%.
'If products are underperforming, members have a right to know'
Some funds and commentators have argued that there should be ESG-based exemptions from the government's super fund performance test, or even that socially responsible super options should be exempt from the performance test.
Super Consumers Australia says calls for a carve-out are coming too soon.
O'Halloran says that recent developments, including the greenwashing cases, as well as the regulator's decision to focus on greenwashing claims and the government's work on making climate risk clearer for investors, show that we're just starting the process towards working out what is best practice for funds adopting an ESG approach.
Consumers deserve to be confident that their super fund can back up any claim about taking action on environmental or social issuesXavier O'Halloran, Super Consumers Australia
"Industry and regulators are still defining the boundaries of ESG. You can't create a carve-out if you don't know what you're carving out."
"If products are underperforming, members have a right to know. Bringing in any exceptions or non-performance data would detract from the clarity and usefulness of the test.
"It's time to clarify what ESG means and how a fund's actions contribute to sustainability goals. Consumers deserve to be confident that their super fund can back up any claim about taking action on environmental or social issues."
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.
Stock images: Getty, unless otherwise stated.