Understanding ESG and its relationship with investment returns

6 August 2025

Explore how we consider environmental, social and governance (ESG) issues in our investment processes with the aim of creating better long-term financial outcomes for members.

ESG in investing terms refers to Environmental, Social and Governance considerations. Just like traditional financial factors, ESG factors can create risks and opportunities for a company’s operations and performance. Examples of ESG factors include:

Environmental: Looks at how a company acts in relation to the environment, which includes things like its carbon footprint or waste management.

Social: Considers how a company acts towards its employees, customers, suppliers and the community it operates in.

Governance: Looks at a company’s operating model, its leadership, how its board of directors is run, and its internal policies and culture. We believe ESG considerations are an important part of managing investment risks and opportunities and maximising investment returns for members.

Our approach

Our ESG and Stewardship program seeks to identify the ESG risks and opportunities that are relevant to the investment value of companies and assets, consider them when we invest, and advocate for their effective management during ownership. The application of the program varies by asset class and investment characteristics, including whether we’re investing directly or through external managers, or whether our investment is actively or passively held. We have a dedicated global team of ESG professionals who work closely with the investment team. This team is responsible for the implementation of our ESG and Stewardship program.

Why relationship to value is important

Unlike impact or ethical investing, our approach to ESG focusses on consideration of investment value. Ethical or impact investors primarily invest based on a specific set of values or to achieve a positive impact while generating a financial return.

We have a legal obligation to members to act in their best financial interests. Depending on the asset class and the specific investment, we seek to consider ESG issues as part of our investment process where we believe it can impact investment value, and we do this because we consider it part of our fiduciary duty.

While quantifying the relationship between ESG and investment returns is complex due to differences in terminologies, methodologies and data sources, there are studies that indicate a positive relationship between ESG performance and financial performance. For instance, in a 2021 report¹, a review aggregating over 1,000 studies found a positive relationship between ESG and financial performance in almost 60% of corporate studies (which focused on operational metrics such as Return on Equity, Return on Assets and share price). This report also found that “improved financial performance due to ESG becomes more marked over longer time horizons.” The report concluded that this analysis “points to a growing consensus that good corporate management of ESG issues typically results in improved operational metrics.”

Our priority ESG issues

We’ve identified priority ESG issues which provide a starting point when looking to invest in a company or asset. We may look at other issues if we think they could impact the value of the investment.

In terms of our integration and stewardship initiatives, climate change, workforce and governance are the most advanced issues.

Good governance practices are important because we believe that well run companies with the right board composition, skills and experience will be more effective at managing ESG risks and opportunities which can impact their performance over time.

Workforce considerations are important because we believe that companies with strong workforce practices are better positioned to deliver strategic objectives and long-term value. This is because fair and sustainable employment conditions can help attract and retain skilled workers, while poor practices can expose companies to legal and reputational risks. We believe a safe and healthy workplace is fundamental to business operations².

Climate change risks are important because physical risks and transition risks and opportunities can impact long-term asset valuations and investment performance³. Physical risks are those which can damage assets through events such as extreme weather. Transition risks and opportunities are created as the world transitions to a low-carbon economy and can be influenced by factors such as policy shifts and changes in technology.

Our stewardship activities

We engage with certain companies to seek effective management of ESG issues that we believe can most impact the value of our investments. We meet with certain companies listed on the stock exchange (directly or indirectly via investor networks or engagement service providers), and for unlisted assets, we may meet with certain boards, management, and investment managers. We may also appoint non-executive directors to the boards of portfolio companies where we have the right to nominate directors.

Additionally, we vote on company and shareholder resolutions for both Australian and international listed companies in accordance with our Share Voting Approach. Each year, we vote on matters such as director elections, remuneration plans, capital structure, and shareholder resolutions.

We measure our contributions to the Sustainable Development Goals

While focusing on generating long-term returns for your retirement, we recognise the impact our investment and stewardship activities can have on global sustainability outcomes, such as the Sustainable Development Goals (SDGs).

Some of our investments contribute to the Sustainable Development Goals; a set of 17 global goals established by the United Nations in 2015 designed to address a wide range of global challenges. We have measured the contribution of our investments in the Australian shares, international shares and fixed interest asset classes to the SDGs and publish this in our Annual Report.

We believe ESG integration and stewardship are important for long term returns

We invest in a globally diversified portfolio of assets in different sectors of the economy which include exposure to a variety of industries and countries around the world. This includes those held in passive portfolios that invest in market indexes with broad regional exposures.

Apart from companies involved in the production of tobacco products, including companies that grow or process raw tobacco leaves, we do not apply sector exclusions or screens to particular industries. For more detail on the exclusion of companies involved in the production of tobacco products, including details of exceptions to the exclusion, see our Investment Guide.

Excluding companies from the investment universe takes away our ownership rights, while also reducing diversification, which can impact the risk/return profile of the portfolio and your retirement savings.

However, we understand that members have diverse values, preferences and attitudes when it comes to investing and offer the Socially Aware option which excludes certain assets based on ESG criteria.