A retail superannuation fund and four industry funds demonstrate top ESG leadership, while ESG options in super funds represent $160 billion in assets under management, according to ground-breaking new research from Rainmaker Information.
Australian Ethical Investment, CBUS Super, AustralianSuper, HESTA and Aware Super have the highest scores against a range of factors including diversity, ESG reporting, portfolio holdings disclosure, the investor groups or affiliations it belongs to, the use of positive and negative screens and other factors. LGS, UniSuper, Future Super, HOSTPLUS and Mercy Super round out the top ten.
Rainmaker Information has published these findings in its inaugural ESG Superannuation Study. Rainmaker assesses the elements of being a quality ESG super fund against five dimensions - governance, or how the fund declares its commitments to ESG principles; investment transparency, or portfolio level disclosure and disclosure on engagement with invested companies; publication of ESG reports; disclosure of the investment process and how a fund implements ESG principles; and performance, or whether the fund achieves its investment objectives and satisfies the Sole Purpose Test.
Rainmaker took the approach of rating super funds on their ESG-related activities because it's a "pragmatic, evidence-based approach," said Alex Dunnin, executive director of research and compliance at Rainmaker Information.
"ESG advocates are like every other walk of life in that talking a big game is easy," Dunnin said. "So we need things to point to. And surely if a funds proclaims a commitment to ESG principles, that fund should be declaring its hand so it can be judged, which might mean it's savagely criticised. But if you can't stand the heat, get out of the kitchen. RSE boards with glass jaws should not declare themselves to be ESG funds."
There are now 36 super funds that collectively offer 171 ESG investment options. Rainmaker estimates these ESG options to hold $160 billion in AUM.
Rainmaker also estimates there are 57 ESG super funds in Australia that collectively oversee $1.6 trillion being 71% of Australia's superannuation APRA-regulated market. This makes Australia's ESG super coverage ratio among the highest in the world.
Almost three-quarters of these funds are not for profit (NFP) funds, meaning they are either corporate, industry or public sector funds, with the remaining 30% being retail funds.
The ESG Superannuation Study also analysed five-year investment returns for the MySuper option of ESG super funds, or flagship equivalent if a super fund didn't offer MySuper. That analysis reveals that these funds outperformed the Rainmaker MySuper index by 0.06% pa over three-years and 0.28% pa over five-years.
"While this is only marginal outperformance, it's worth noting that half of all ESG funds outperformed the Rainmaker MySuper index," the study noted.
Rainmaker Information's first assessment of the ESG qualities of super funds found several areas for improvement, noting that of the ESG super funds covered in the study, only 75% of Australia's ESG super funds practice portfolio holding disclosure (PHD). Of the 14 funds that don't practice PHD, half are NFP funds and half are retail.
"Transparency is the cornerstone of ESG," Dunnin said. "It's not illegal for a fund to not declare its portfolio holdings, but being an ESG leader is about that - leading. We have to acknowledge that portfolio holding disclosure is rapidly improving, and it's time funds disclosed not just the easy investments into equities but across the park."
The study found that nearly all - 98% - of ESG funds practice PHD in their Australian equities and 83% in their international equities, the proportion of funds practicing PHD for property and infrastructure stands at about 40%. One-quarter of ESG funds practice PHD for fixed interest bonds and cash, but only 10% disclose private equity holdings.
The study also labelled the way in which many ESG super funds display their ESG statements, reports and disclosures is "haphazard."
"The 'haphazardness' of the way some ESG funds tell their ESG story means much of their good work stays buried," Dunnin noted. "There's no point doing it if this the play. But in fairness to ESG funds, this new ESG ecosystem is still evolving. Rainmaker is supremely confident it will make big advances and rapidly.
"But that said, we have to say that even among what we would classify as Australia's best, most authentic and smartest ESG super funds, capturing the information was quite a chore. It was like trying to herd cats."
The study noted that ESG information can be difficult to find, accessible "only after complex multi-tiered searches, sometimes with dead links and scattered across multiple sections of their websites."
This warrants urgent attention by ESG super funds, in Rainmaker's view.