A good super fund thinks ahead when it comes to its investment strategy – it’s about balancing short-term and long-term risks and opportunities for members. For a fund like AustralianSuper, it’s important to look ahead to identify potential risks and issues that could impact the future value of any investments, for example, looking at environmental, social and governance (ESG) factors of an investment.
There are lots of different ways your super fund may invest responsibly, and often the terms ethical investment, impact investment and ESG can be interpreted differently, and vary in their application.
ESG, Ethical investment and Impact investment – what it all means
Understanding the key terms associated with responsible investment helps you better understand your fund’s approach.
ESG and ESG integration
ESG stands for Environmental, Social and Governance and they’re an important part of how AustralianSuper invests your money.
ESG integration is about ensuring environmental, social and governance factors are considered in the investment process and are correctly valued. Unlike ethical investment, ESG is not a separate investment strategy - it’s part of the broader investment process.
In very simple terms:
- Environmental: Looks at how a company acts in relation to the environment
- Social: Considers how a company acts towards its employees, customers, suppliers and the community it operates in.
- Governance: Looks at how a company operates, its leadership and how its executive board is run, and what its internal policies and culture look like.
A focus on ESG is important to AustralianSuper. These 3 factors can affect the long-term performance of an investment so they need to be valued correctly.
Ethical investment is where investment decisions are made based on personal beliefs and values, rather than financial value. This type of strategy excludes certain businesses, business types or industries because those organisations are involved in products or practices that don’t gel with an investor’s values or beliefs. For example, some funds might exclude companies which have exposure to gambling or are involved in live animal exports.
Impact investing - chooses investments that will have a positive impact
Another type of investment is impact investing, which actively chooses investments that will have a positive impact on specific environmental, social or economic goals. For example, some funds might actively invest in renewable energy, recycling or healthy food production.
Why ESG matters for AustralianSuper members
ESG factors are important as they can affect the long-term performance of companies, both operationally and financially. The AustralianSuper investment team assesses them as part of the decision-making process for all investments, across all investment options.
E - Environmental factors considered
Environmental factors can include:
- climate change
- energy efficiency
- waste management
AustralianSuper looks at the risks these issues may pose to an investment and how they’re being managed. In 2019, climate change was the biggest environmental factor in the portfolio, and it will continue to be for future investments.
Climate change poses 2 significant risks to businesses:
Physical risks: An asset’s geographic location can make it susceptible to risks such as physical changes in the environment caused by climate change. These can include severe events such as cyclones, floods and bushfires or the impacts of longer term shifts in climate patterns such as rising sea levels. For example, AustralianSuper needs to make sure road infrastructure assets we invest in are designed and built to withstand future environmental changes.
Transition risks: This covers issues such as regulatory, technological or consumer behaviour changes as the economy transitions from being fossil fuel dependent to a low carbon economy. For example, how might the shift to electric cars and a renewables generated electricity grid impact a business.
S - Social factors considered
The ‘S’ in ESG looks at how a business treats its workforce, suppliers, customers and other stakeholders, such as the community.
Issues can include:
- human rights
- labour standards
- workplace health and safety, within local operations and across the supply chain.
For example, companies can be exposed to a range of operational, financial and reputational risks arising from inadequate management of their labour supply chain. Issues can include child or forced labour, equality and discrimination and poor working conditions.
G - Governance factors considered
Governance refers to the systems, structures and policies in practice within a business, and how transparent that business is about telling others about these practices. Issues can include the composition and gender diversity of boards; how much executives are being paid and company culture and behaviour.
How AustralianSuper manages ESG issues
AustralianSuper’s ESG program has 3 pillars:
1. ESG Integration
This is where we assess and integrate ESG risk and value factors when choosing investments. As mentioned above, this is about ensuring that ESG factors are considered and are correctly valued.
As Australia’s largest super fund, with a global investment outlook, AustralianSuper can make sizeable investments into businesses and companies. Being a large shareholder gives us certain ownership rights and responsibilities. We proactively engage with companies to influence their management of ESG and other issues, and we can also vote on company and shareholder resolutions. We also collaborate with other global investors to amplify our voice and have an even bigger impact on issues that can affect members.
We recognise that members have different social and ethical views, so we conduct member research every 2 years to keep up to date with what’s important to them. The Fund offers a choice of investment options including the Socially Aware option, for members who want to avoid investing in industries and companies that don’t align with their values, and Member Direct offers greater control and choice in the investment of your super or retirement income.
Investing at scale to change how businesses operate
ESG affects all investment choices made by AustralianSuper – big and small. Because of the Fund’s size, we can invest at scale in certain companies and effect positive change by influencing how a company operates. For example, asking a company to reduce their carbon footprint and review its operations in relation to climate change policies.
AustralianSuper Members - Socially Aware Option
Take control of where your money is invested.
Members have different values, so it’s important we consider these preferences in our investment options. For members who want to avoid investing in industries and companies that don’t align with their values, AustralianSuper offer the Socially Aware option.
The Socially Aware option invests members money using strict screening based on environmental, social and governance standards. It doesn’t invest in the shares or fixed interest securities of Australian or international companies that:
- directly own fossil fuel or uranium reserves*
- produce tobacco, cluster munitions and land mines
- have single gender boards i.e. exclusively male or female boards (ASX 200 companies only)
- have been flagged as having human rights, labour, environmental or governance controversies
The Socially Aware option removes investment in companies that own fossil fuel or uranium reserves regardless of the size of their ownership. We believe this is the simplest, most transparent way of removing these investments at their source while enabling the option to meet its investment return objectives.
The option can still invest in companies that invest in, provide services to, or buy, process or sell products from the excluded companies. These might include companies that have shareholdings in or banks who lend money to a company, service-providers like security, catering or office suppliers or petrol refiners and distributors.