HESTA says ethical screens partly to blame for 'disappointing' ESG returns

Riddhima Talwani

HESTA's Sustainable Growth option returned members 2.75% over the last year. In comparison, its High Growth and Conservative options returned 11.5% and 6.4% respectively.

In a statement to Financial Standard HESTA noted member aligned exclusions as partly responsible for 'disappointing' financial-year-to-date returns in the Sustainable Growth option.

In addition to HESTA's fund-wide approach to responsible investment, the Sustainable Growth investment option applies a broad range of exclusions including in companies invested in fossil fuels, tobacco, uranium, controversial weapons, nuclear weapons, weapons, for-profit detention, red flags identified by its data provider related to human and labour rights breaches, red flags identified by our data provider related to environmental breaches, poor ESG policies and systems, uncertified palm oil, gambling, live animal exports and poor sovereign ESG ratings.

HESTA also listed concentration in active strategies, including lower exposure to major US technology stocks and individual asset performance as some of the reasons for the low performance.

The over $100 billion super fund noted it has been continuing to refine the strategy of the option and through the year has increased diversification to help manage risk and improve resilience across market conditions.

"Our investment decisions are focused on the long-term financial interests of members," HESTA spokesperson said.

"We regularly monitor the performance of all our investment options and consider a range of factors, including performance against investment objectives, peers and the Your Future Your Super performance test."

IGCC's latest survey State of Net Zero Investment 2026 speaking to Australian institutional investors noted the  Your Future Your Super performance test was one reason hindering institutional capital allocation at scale to climate-aligned opportunities.

Treasury is currently consulting reforms to address benchmarking-hugging incentives encouraged by the superannuation performance test.

Treasury acknowledged the industry's concerns super funds are constraining their investment universe and staving off allocating to assets outside the mainstream to ultimately pass the test or reduce underperformance.

While HESTA did not confirm the fund would be closing, Financial Standard understands that if it did consider closing the fund, it typically wouldn't require the sale of underlying assets, which would continue to be held as part of the fund's broader portfolio.