How Green Is Your Super?

By Adrian Herbert

Eco Investor, August 2006

Environmentalists may feel a warm inner glow as they hear yet another executive talking about how the superannuation industry is backing protection of the environment. But just how green are our superannuation funds and particularly the investment options they offer to contributors?

The answer is clearly nowhere near as green as many might believe.

As with ethical investment funds, which we examined in the last issue of Eco Investor, the key issue is that super funds primarily achieve “green” exposure by investing in sustainability and socially responsible investing (SRI) funds. Sustainability funds operate negative screening processes to eliminate potential investments regarded as non-sustainable but that is, of course, a long shot from selecting environmentally positive investments.

SRI funds have evolved from the funds which used to be known as “ethical funds”. SRI funds primarily focus on investing in businesses which follow good social principles. This rules out investing in companies which cause serious environmental damage but environmental considerations generally rank behind social considerations in their investment decision making.

Our research turned up only two super fund which offer a clearly labeled green investing option: Health Employees Superannuation Trust Australia (HESTA) and Non Government Schools Super (NGS).

HESTA offers the Eco Pool option. The Australian equities component of this option is invested in a fund managed by BT Funds Management with the ecological ratings determined by Monash Sustainability Enterprises.

NGS offers the Green Shares option which is managed by AMP, Ausbil Dexia and Sustainable Asset Management (SAM).

Looking at the funds in general rather than the options offered, the most heavily weighted toward environmentally positive investments appeared to be the Australian Ethical Superannuation Funds. As a manager, Australian Ethical Investment makes specifically environmentally positive as well as sustainable investments. These funds currently invest exclusively via the four associated Australian Ethical Investment funds. The trustees do, however, have authority to make direct investments.

Many more super funds offer socially responsible or sustainable investing options and the number offering sustainable investing options has increased over recent years.

Of those that offer socially responsible investing (SRI) or sustainability options, however, only a small number include specific references to environmentally positive investing and many of those actually invest through SRI funds.

Sustainability funds generally have a stronger emphasis on protecting the environment than SRI funds but essentially only to the extent of screening out investment in industries which are considered nonsustainable.

The increasing investment in sustainability funds and the growth of sustainability rather than environmental investing options probably reflects the fact that the economic benefits of these funds are more readily apparent than investments which have a more specific environmental focus.

As environmental matters are seen to be more closely linked to profitability these funds are, however, likely to widen their environmental criteria.

The managers of superannuation funds, the trustee offices, recognise growing member interest in ecological issues but generally regard this as part of a much wider trend: a desire to see that their superannuation funds are invested responsibly as well as profitably. That includes paying due regard to corporate governance and social responsibility as well as ecological matters when investing. Consequently it seems unlikely, at least in the short term, that environmental investing will be offered as a separate investment option by many more funds.

Despite some expressing interest in the concept, super fund members clearly have not got behind the concept of environmental or even sustainability investing where it counts, in selection of their super fund investment options. The proportions of members opting to make selections remains relatively low.

VicSuper, for example, has made a commitment to sustainable investing in all its investing as well as offering members an Equity Growth Sustainability option. This option, however, still had the lowest take up rate at 0.8 per cent on the latest figures available, 2004-05; however this was an increase over a rate of 0.6 per cent the previous year.

The Australian Super Fund (ASF) - recently formed by the merger of ARF and STA - offers three options based wholly or partly on socially responsible investment principles.

Investment analyst with Australian Super, Richard Lawrence, said the Sustainable Balanced Investment Option was introduced in October 2001 and the Australian Sustainable Shares and International Sustainable Shares options introduced in January 2002.

He says the trustees decided to offer these products as a result of requests from members but the level of interest so far had not been great. Investments in the Sustainable Balanced Investment Option amounted to $16 million, the Australian Sustainable Shares Investment Option $11 million and the International Sustainable Shares Option $3 million - not a substantial part of a $20 billion fund, he added.

It appears the majority of super fund members do not make choices but simply accept default options. This could be the result of members not understanding their options but this seems an unlikely explanation considering the easy to understand investment information super funds send to their members and post on their websites.

A more likely explanation is that super fund members’ primary concerns remain ensuring that they get the best returns from their contributions. They are, therefore, reluctant to risk moving from “standard” choices. Clearly “green” investment options, or other options beyond the standard range based on time to retirement, would be likely to be seen as increasing risk.

The recent introduction of choice of funds and portability in the super regime may, however, have the effect of encouraging contributors who place high priority on environmental factors to select their super funds accordingly.

James Thier of Australian Ethical maintains this is happening with that manager’s products.

He says the funds have grown to $200 million in eight years. Since the introduction of super choice the inflow of new members has increased and many have stated environmental concerns as a reason for their choice.

But although green investment options appear unlikely to be more widely adopted in the superannuation industry, this does not mean that the funds themselves will not become more green. This, it seems, is most likely to occur as a result of superannuation funds progressively changing their overall investment criteria as the advantages of environmental investing become increasingly clear.

In fact a number of super funds are already among the leaders in the greening of the Australian investment community.

Super funds, and industry funds in particular, are well placed to put into practice social values as well as economic values and many are doing so. This can be expected to increase where it can be shown that adoption of social values, including environmental values, can produce better long term economic performance. This should then flow on to the funds managers they use and to other institutional investors.

Most of the current environmental investing by super funds is in equities - Australian and international - invested through managed funds but a number of super funds have substantial direct investments in infrastructure and these include a number of investments in environmentally positive projects. For example, super funds have been significant investors in major recycling schemes and plantation forestry as well as backing early stage ventures in alternative technologies.

Sustainability and green investing principles are also being applied by super funds to property investing and could influence practices in this industry.

VicSuper, for example, invests in the Colonial First State Property Direct Property Investment Fund. The fund says it “has engaged with CFSP on the inclusion of sustainability measures in the management and operating of properties”.

In the private equity area, VicSuper has committed 10 per cent of its sector allocation “to early stage and expansion stage companies whose products or services contribute towards and/ or assist in using resources more efficiently and reducing the ecological impact of economic development”.

Consequently, while the investment options offered to super fund members may provide only limited opportunities for members to ensure their super contributions promote green initiatives, many of the funds themselves are going through a more significant overall greening process.

One of the first, if not the first, environmental option by an Australian superannuation fund was offered by Health Employees Superannuation Trust Australia (HESTA) in February 2000. Investments and Governance manager for HESTA, Rob Fowler, said the option was offered in response to the findings of a survey of fund members.

The survey showed that members were less concerned about industries such as alcohol, gambling, and tobacco, which are often filtered out by ethical funds, than environmental issues such as nuclear power. Supporting or not supporting industries such as alcohol, gambling, and tobacco were matters over which they could exercise personal choice but they felt that as individuals they were much less able to influence issues such as nuclear power. Therefore they wanted to through their super fund investments.

Mr Fowler said HESTA has aspirations to extend the principles of socially responsible investing to a substantial proportion of its total funds through allocating more funds to managers which specialise in this sector.

“We think it is important to include the wider area of corporate social responsibility (CSR) rather than just ecological investment ,” he added.

He said the importance HESTA placed on ecologically sound investing was, however, illustrated by the fact that the super fund is a member of the Investor Group on Climate Change (initially sponsored by VicSuper) through which it supported the promotion of the UK-initiated Carbon Disclosure Project in Australia.

HESTA had also recently made a small initial “incubator allocation” to the emerging fund manager Generation Investment Management of which environmental campaigner and former US Vice President Al Gore is chairman. Generation Investment Management was established in 2004 by former chief executive of asset management at Goldman Sachs, David Blood. It has analysis of CSR issues as a core compoent of its investment process.

Christian Super exercises an ethical screening process “to incorporate Christian values” across all its investments. This includes a specific reference to meeting environmental standards. All five of Christian Super’s investment options have to meet its ethical standards.

So, how green is your super?

The following are profiles of major super funds involved in environmental investing. We don’t claim this to be an complete list and Eco Investor would be pleased to report on the environmental credentials of other funds in a future issue.

* Health Employees Superannuation Trust Australia (HESTA) offers the Eco Pool investment option. The Eco Pool option is invested 50 per cent in Australian shares, 40 per cent in international shares and 10 per cent in cash investments.

The Australian shares component is determined through a negative screening process with remaining companies then selected on a best of breed basis across all sectors to which allocations are to be made. This, for example, does not exclude mining but does exclude companies such as BHP Billiton and Rio Tinto because of their involvement in uranium mining.

The international shares component is screened according to economic, environmental and social criteria. Companies are categorised into industry sectors; they are then evaluated and rated for environmental management and sustainability factors within their sector. After being assessed on their financial performance, investments are made in the best rated companies in each sector.

The Australian component of the Eco Pool is managed by BT Funds Management with the ecological ratings determined by Monash Sustainability Enterprises. The international component is managed by Dexia Asset Management which includes ecological rating within awider socially responsible investing assessment process.

* Australian Super Fund offers three options that are “based wholly or partly on socially responsible investment principles: Sustainable Balanced, Australian Sustainable Shares, International Sustainable Shares”.

According to Australian Super, “socially responsible investing provides the opportunity to build an environmentally and socially sustainable future while aiming to provide steady investment returns in the process”.

The Sustainable Balanced Investment Option includes investments in shares, property, fixed interest and cash. At present, however, only the Australian and international share components of this option are screened for ethical, green or sustainable policies and practices.

All investments in the Australian Sustainable Shares Investment Option and the International Sustainable Shares Option are screened.

The Australian Sustainable Shares option is managed by Perpetual Investment Management and Bankers Trust and the International Sustainable Shares Option by DEXIA Asset Management.

* VicSuper first began to introduce sustainability concepts about five years and now applies sustainability criteria to the management business as well as its investments. This has involved integrating economic, social and environmental considerations into all of its decision making processes.

VicSuper introduced an Equity Growth Sustainability Option in 2001-02. The option has a 6 per cent return objective and obtains advice on asset allocations from Frontier Investment Consulting Pty Ltd .

VicSuper’s manager sustainability investments, Peter Lunt, said “To date we have selected direct property and listed equity managers who incorporate sustainability analysis as part of their asset management.”

The fund is also looking for investment opportunities that rate well on financial and non financial criteria. The non-financial criteria include corporate governance, human resource management and environmental performance.

Under the sustainability option the fund invests in a selection of large Australian and international companies that are rated by SAM Sustainable Asset Management as sustainability leaders in their industry sector. In its property portfolio, Vic Super invests in the Colonial First State Property Direct Investment Fund. During 2005-06 the fund committed to invest in ecosystem service industries such as forestry.

VicSuper facilitated development of the Investor Group on Climate Change Australia/New Zealand in order to provide a forum for institutional investors to consider climate change risk and develop appropriate responses. Other members of the group include Catholic Super, BT Financial Group and AMP Capital Investors.

The IGCC is supporting the adoption in Australia of the International Group for Climate Change’s global Carbon Disclosure Project. Launched in 2000, the CDP provides a London-based secretariat for international institutional investors on the investment related risks of climate change. The CDP seeks information on management of carbon emissions from major companies world wide. Australia & New Zealand Bank, Rio Tinto, Telstra, Westpac and BHP Billiton are among Australian companies that have provided reports to the CDP.

* Non Government Schools Super (NGS) has provided aGreen Shares option since November 2001. Since inception, the option has returned an average of 5.44 per cent. The Green Shares portfolio is managed by AMP Henderson, Ausbil Dexia and Sustainable Asset Management (SAM).

The portfolio includes international and Australian shares selected on the basis of social and environmental criteria. The option is divided into four investment vehicles: AMP Sustainable Future Australia Share Fund, AMP Sustainable Future International Share Fund, Ausbil Dexia Sustainable Global Equity Fund and SAM Sustainability Leaders Australia Fund.

* Statewide Superannuation Trust of South Australia offers a Socially Responsive option. This is similar to the fund’s Growth option except that the management of the listed equity components focuses on managers who construct portfolios on socially responsive grounds. The option includes 27.5 per cent Australian shares, 25 per cent international shares and 42.5 per cent from the fund’s Target Return Portfolio.

The Target Return Portfolio is 34 per cent infrastructure, 34 per cent property, 11 per cent private and development equity, 11 per cent Absolute Return strategy funds, 5 per cent timberland investments and 5 per cent debt obligations.

Investment managers include Sustainable Asset Management. The return target of the Socially Responsive option is the CPI plus 2.5 per cent.

* Australian Ethical Investments invests through its managed funds. Investments in the funds are made using a screening process which includes environmental considerations. Investments are also selected on positive environmental grounds. Options are: Balanced, Equities, Income and Large Companies Shares.

* JUST Super offers Sustainable Australian Shares and Sustainable International Shares options. It says these options offer the opportunity for members to invest their super in companies that lead the integration of economic, social and environmental factors into their business strategies. Investments are made via a best of sector approach which suggests that companies that manage risk well in certain areas will perform in the future. JUST’s Sustainability portfolio is managed by Sustainable Asset Management.

* Christian Super uses an ethical screening process to incorporate Christian values in its decision making process across all investment options. This involves screening out negative potential investments and investing more heavily in investments regarded as ethically positive. Investments must meet trustees’ environmental, corporate governance and social standards. Strategic investments are also made into community projects.

Options are: Ethical Shares, Ethical Growth, Ethical Balanced, Ethical Cash and Ethical Stable. Returns on the first three options in the year to June 2005 were 12.4 per cent, 11.2 per cent and 9.6 per cent. Fund managers used include Ausbil Dexia, Portfolio Partners, Merrill Lynch, AXA Rosenberg, Mercer Investment Management.

* Care Super offers a Sustainable Balanced option. The criteria of this option include that funds are not invested in companies involved in production of tobacco, alcohol, nuclear power, fur harvesting or animal testing or which have been identified as environmental offenders.

* Sun Super offers a Balanced option which invests in AMP Capital’s Responsible Investment Leaders Balanced Fund.

* Catholic Super offers an Ethical Balanced option.

* Uni Super offers a Socially Responsible Shares option.

* Westscheme Superannuation Fund includes a Screened Investment option.





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