More ESG transparency needed in the super sector

New research shows super funds with an ESG focus have well and truly arrived and now represent the majority of the superannuation market both financially and in terms of the number of funds in the market – now it is time to hold them accountable.

Super funds investing in the environmental, social, and corporate governance (ESG) space need to be more transparent, says a superannuation research firm following the release of its most recent report.

Research and compliance director at Rainmaker Information Alex Dunnin says its latest Superannuation Benchmarking Report is attempting to quantify exactly what benchmarks are needed for a functioning ESG-committed super fund following huge growth in ESG investment.

“There are loads of funds claiming to have an ESG focus and that is all well and good but I wanted to find out who is doing it properly, and what that actually means, because the ESG offering is huge from a financial perspective and can have international finance implications because of its sheer size,” he said.

Currently ESG-focused funds oversee $1.8 trillion, up from $1.6 trillion last year, accounting for 71 per cent of Australia’s market for institutional (APRA-regulated) superannuation. 

Dunnin said it was time to get some clarification on who was doing what. 

“We spoke with politicians, regulators and the investors themselves to find out: what are the markers? Who are the big players?” he said.

What it takes to be an ESG fund leader

As part of the report, Rainmaker launched its inaugural ESG Leader Rating rating to determine those at the top of the field.

It used the following evidence points to determine who made the cut:

• Governance – evidence the fund declares itself committed to ESG principles, outlines its commitments to those principles and publishes a statement of values, that the fund has diverse leadership, is an ESG protocol signatory and that the fund actively engages with stakeholders.
• Investment – disclosure of investments, compliance with portfolio holdings disclosure laws and the publication of proxy voting reports.
• Publishing of environmental impact reports, ESG reports, carbon disclosure, social impact reports, modern slavery act statement.
• Disclosure of investment processes practices including investment screening processes with regards to ESG investments.
• Performance, achievement of investment in a competitive manner, demonstrates investment risk management.

Only 32 super funds were identified as leaders, having met all of the above criteria. This is from a possible 43 leaders that identify as ESG super funds, meaning they are a signatory to an ESG protocol, they offer ESG investment options or they follow standard ESG practices.

The report also identified the top performing ESG super funds, by five-year MySuper returns. 

The top five ranked in order are Aware Super with 11.38 per cent return on investment, Active Super with 10.10 per cent, Hostplus achieved 10.03 per cent, AustralianSuper with 10.01 per cent and TelstraSuper’s MySuper option on 9.91 per cent.

Transparency is the foundation of this market moving forward

In all, Dunnin says what the report was seeking – and what he believes it achieved – was to create accountability about transparency and to give clarity to the market.

“Transparency, both of what funds are investing in, transparency with regard to how they are reporting, and what they are promising. This is the first step in this investment space,” he said.

“Transparency is the foundation we need. It was becoming so ubiquitous and we needed clarification because there is a lot of money at stake and it actually impacts financial markets more largely.”

The report states that although almost 90 per cent of ESG super funds publish a climate position statement, there are fewer that publish a Modern Slavery Act statement (82 per cent) and only 73 per cent disclose their investment screening processes. 

The good news, Dunnin says, is that super funds are publishing more information, and that information is clearer and more comprehensive.

“Funds are also trying to more thoroughly reflect the Paris Treaty and commitments flowing from COP26 regarding how they describe their net-zero commitments, investment processes and how they may be trying to incorporate the sustainable development goals rather than just declare their negative investment screens,” he said.

He says funds are also shifting from exclusions to inclusions, pushing them to “talk more about ESG-active investing and engagement strategies with the businesses and projects into which they invest”.

You can see the full list of ESG Leader superfunds for 2022 here.