Consumer demand for ethical and responsible superannuation and investment options has increased dramatically over the past decade, as consumers disappointed with government inaction, put their money where their values are.
Consumers vote with their feet
The Responsible Investment Association Australasia (RIAA) conducts regular studies of consumer demand for responsible investments in both Australia and New Zealand.
The RIAA's latest study in Australia for 2022 found that the percentage of Australians with responsible investments increased from 13 per cent in 2020 to 17 per cent in 2022.
A separate study of New Zealand found that the number of people willing to move their funds if investments did not align with their values rose four percentage points, to 59 per cent over the 12 months to early 2023.
In New Zealand, default KiwiSaver superannuation funds are now required to have a responsible investment policy and exclude fossil fuels, making the scheme one of the only pension fund systems in the world to do so.
Simon O'Connor has been chief executive officer of the RIAA since 2013 and has noticed a huge shift in the broader consideration and uptake of ethical and responsible investments during his tenure.
Green investment grows roots
"I think of ethical investing in 2013 as being a niche cottage industry on the sidelines of financial services," he says. "Passionate consumers were opting to invest their savings or their superannuation ethically," he says.
"Today, we see this whole concept has been deeply embedded across the financial services sector, it's being written into codes and regulations and law, and is a consideration of our largest financial institutions across our country, and indeed, globally."
Insurers that fail to prioritise responsible and ethical investment strategies as part of their broader environmental, social and governance (ESG) policies risk being excluded from this growing market, warns EY in a December 2022 report.
“The continued growth of these 'green' and sustainable funds means insurers must actively monitor and promote their ESG ratings to retain full access to capital and manage the potential impacts on their stock price,” the report says.
Avoiding misleading conduct
RIAA's responsible and ethical certification for investment funds — the longest-running responsible investment certification program in the world — is considered the benchmark for funds wanting to operate in this space in Australia and New Zealand.
"We have something in the order of 340 products certified across Australia and New Zealand [including] a lot of superannuation fund products.
"A big focus of that is ensuring that the way people are marketing and talking about their products is clear, accurate and not likely to mislead," says O'Connor.
Although there is no official definition of responsible or ethical investing by regulators in Australia, there are rules and prohibitions against misleading and deceptive statements and conduct.
Funds need to be able to prove any claim they make about being ethical or sustainable — as do insurers that are providing members with default life insurance cover through the fund.
As the industry has grown, greenwashing is increasingly scrutinised by the Australian Securities and Investments Commission (ASIC).
Most recently, ASIC announced it had lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia, alleging misleading conduct in relation to claims about certain environmental, social and governance (ESG) exclusionary screens applied to investments in a Vanguard fund.
"From our view, the regulator is coming down pretty hard on this, but that has merit. We don't want consumers misled here, as that risks eroding all the trust they put in the sector. So, from our perspective, it's really important work," says O'Connor.
ASIC has also issued an information sheet — How to avoid greenwashing when offering or promoting sustainability-related products — to help funds and insurers avoid mispresenting the extent to which a financial product or investment strategy is ethical or sustainable.
Shift in focus
Australian Ethical, which also operates Australian Ethical Super, is a standalone ethical investment manager that has been operating in Australia since 1986.
It launched its superannuation offering a little over a decade ago and offers members default life insurance cover (made up of Death and Total and Permanent Disablement Cover) through MetLife.
Ross Piper, who is Australian Ethical’s chief executive for Superannuation and chair of the RIAA board, says the industry’s definition of ethical or sustainable investments has changed a lot over the past decade.
"Initially, it was probably largely focused on divestment, so avoiding industries or sectors or companies that were damaging to the environment or to people or animals," says Piper.
"But over time, we've seen that mature and strengthen to a much stronger narrative that is not only about what you avoid but equally, if not more importantly, about what you target, and that is in terms of positive screening or impact investing.
"And that's a good thing, because consumers are more engaged and hopefully have more options to make informed choices about where they invest their money."
Strong performance outcomes
RIAA's O'Connor says that as the industry has developed, data available on performance in ethical investment options has improved.
"The academics have come in and analysed the data, and what we consistently see is that to invest responsibly and ethically, you absolutely do not have to give up financial returns.
"And in fact, in many cases, [ethical investment] actually supports delivery of stronger risk-adjusted performance investment outcomes, particularly over the medium and long term," he says.
According to analysis by Plan For Life on behalf of the RIAA, the average RIAA-certified Australian equity fund outperformed the market by 3.8 percentage points over the 10 years to March 2023 and 2.6 per cent over the five-year period.
"Investors who are considering these issues are making better informed investment decisions, avoiding risky behaviour in companies in their portfolios, and ultimately, that's helping to strengthen investment outcomes," says O'Connor.
Responsible investing options had a harder 12 months, underperforming the market, as the fossil fuel sector outperformed, largely due to the war in Ukraine.
"We hold our firm conviction around the long-term settings of the portfolio and know there’ll be certain periods in a market cycle where different sectors will either outperform or underperform," says Piper.
Ultimately, advocates in the sector such as Piper and O'Connor say that ethical and sustainable investing can deliver better outcomes for the planet, as well as strong risk-adjusted returns for the investor.