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Ethical superannuation funds are on the rise.
Also referred to as sustainable or responsible investing, these funds work to invest your nest egg so that it aligns with a set of ethical standards. This means that an ethical investment manager will actively screen out companies that engage in poor practices and look to invest in companies that do good for people and the planet.
Ethical super funds are an increasingly significant part of the broader superannuation sector in Australia.
Four in five Australians feel that environmental issues are important when it comes to the investment of their money, according to a study by the Responsible Investment Association of Australasia (RIAA). The report found that nearly 70% of investors believe that environmental issues are the most important theme to avoid investing in.
Related: Best Super Funds Australia
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What Makes a Super Fund Ethical?
Ethical super funds promise to invest in ethical areas such as clean energy, and to not invest in sectors that are considered bad for the environment, such as fossil fuels, while also growing your retirement savings.
This means the fund will exclude industries considered to be ethically irresponsible or harmful to the environment or socially harmful in some way. The latter may mean avoiding investing in companies that do not pay their workers in developing nations fairly or who use slave labour in their supply chains.
Pros of Ethical Super Funds
Socially responsible investing could help you to generate better returns, and also de-risk your portfolio. It might even help you sleep better if you’re worried about the impact of climate change.
Many ethical super funds are achieving good results, and are reporting strong member growth, too. To be clear: there is no guarantee that ethical super funds will also perform well so do your research first.
The number of managed assets using a rigorous approach to responsible investment hit a record value of $1.54 trillion in September, 2022, now accounting for 43% of the total market, figures from RIAA reveal.
A record 45% of investment managers are holding companies to account on matters relating to environmental and social issues, and reporting back to investors on the outcomes achieved. This number has more than doubled in the past two years, RIAA shows.
Cons of Ethical Super Funds
There’s no silver bullet when it comes to investing, no matter where you stash your super. All funds, including ethical funds, will come up against the same market ups and downs as any other investment.
Bear in mind that limiting your investments in one area could mean you’re not quite as diversified as you could be, which is the best way to mitigate your risks to market exposure. Diversification is the name of the game, particularly during periods of market fluctuations.
Of course, not all ethical companies are going to make it in the cut and thrust of the business world. A business might have potential now, but where will they be in five years’ time, and are they reading the market right? These are questions that fund managers need to weigh up, and are best equipped to make the decisions that can ultimately see your nest egg grow.
Make sure you compare the fees you will be paying, too.
How to Compare Ethical Super Funds
Some of the key considerations when deciding which ethical super fund to select include:
- What you care about: Think about what you’re particularly concerned about when it comes to the environment and sustainability issues, and see which fund aligns with those values.
- Performance: Just because a fund is ethical, doesn’t mean they’re performing better than other funds. Make sure you consider how the fund has performed over the long term, and bear in mind that past performance is no guarantee of future returns.
- Fees and costs: How much you will be charged on a monthly basis to be a member of a fund is important to to understand.
- Extras: If you’re switching super funds, make sure you’re comparing apples with apples. If your current fund offers insurance or discounts, check if the ethical fund you’re considering switching too does as well.
- The detail: Take the time to read the small print to understand where exactly your money will be invested, and what promises are being made to avoid greenwashing.
What are some Examples of Ethical Funds?
RIAA assessed super funds promising to be responsible in their approach last year against key criteria, and came up with a list of 12 super funds identified as leading the pack in this space.
These are:
- Australian Ethical
- AustralianSuper
- CareSuper
- Future Super
- Cbus
- Christian Super
- First State Super
- Future Fund
- Future Super
- HESTA
- Active Super
- Unisuper
- VicSuper
- Vision Super
To understand the ethical focus of each fund, head to their website and read through their individual investment approach and review their past performance over at least five years. Also note that this is not a comprehensive list by any means, and be sure to do your own research.
Past performance is no prediction of future performance and this article is general in nature and is not intended as a recommendation of any particular investment strategy or product.
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Frequently Asked Questions (FAQs)
What is the best ethical super fund?
This is subject to change each year and depends on the criteria used, so make sure you take the time to see which fund is rating highly before switching funds. It is always better to look at long-term, rather than short-term performance. You may also find that certain funds have more of an emphasis on certain types of ethical positions that closely align with your values. There is no one-size-fits-all.
Are ethical super funds a good investment?
Yes, they can be, depending on how the market is performing, but they are no different from other kinds of super funds in that some will perform much stronger than others.
What makes a fund ethical?
An ethical super fund focuses on investments in industries that are considered to be ethically responsible. This means they will invest in companies that have social and environmental priorities, and actively exclude companies that don’t demonstrate these values.
How do I pick an ethical super fund?
When comparing funds, consider what you care about, but also make sure you consider key factors such as fees, insurance offerings, performance over recent years and investment options.
You will need to decide what level of exposure to unethical companies you’re willing to accept, and you will also need to look at how transparent the super fund is about where it invests.
How do ethical funds decide where to invest?
Some of the approaches used include screening for industries a fund doesn’t want to support, which could include tobacco, alcohol, weapons, fossil fuels or animal cruelty.
Positive screening measures are also common, to ensure the fund is investing in renewable energy and health care, for example.
