Your Guide to Ethical Superannuation

Note: The information in this article was last updated June 11 2020.

It’s All Linked: Wealth, Superannuation & Climate Change in Australia

According to Credit Suisse’s 2018 ‘Global Wealth Report‘, Australians have the highest median wealth per adult in the world. The 2 biggest factors that contributed to this were: (1) High property values in capital cities and (2) Australia’s compulsory superannuation system.

At the same time, Australia has one of the worst environmental records in the world. In 2017, Australia was the 6th highest emitter of greenhouse gas emissions and to make it worse Australia has now become the largest exporter of coal and highest exporter of Liquified Natural Gas in the world. To top it off, the World Wildlife Fund (WWF) found that in 2018, Australia’s mammal extinction rate is the highest of any country in the world.

Australia’s increase in wealth correlates with the degredation of the environment and the acceleration of climate change.

We have the ability to decouple Australia’s economic prosperity from socially and environmentally exploitative practices and drive wealth through ethical & sustainable investments that impact the world in a positive way.

As the Australian Government stalls on a national energy policy, continues to cut foreign aid and fails to seriously address climate change, Australians have the opportunity to take a leading role on climate change through their superannuation. An increasing number of superannuation funds are rising to the challenge to help make Australia’s superannuation green and ethical by investing in companies that address the biggest environmental and humanitarian challenges of our time.

Australia’s increase in wealth correlates with the degredation of the environment and the acceleration of climate change.

What is Superannuation?

Superannuation, more commonly known as ‘super’, is a compulsory retirement savings scheme introduced by the Australian Government in 1992. Under the scheme, employers pay the superannuation guarantee (SG), which is 9.5% of an employee’s earnings, into their employee’s super fund. The super guarantee is payed ontop of, or in addition to, an employee’s ordinary earnings.

If you like maths and formulas, this is what it looks like: Salary Package = Earnings + Super Guarantee where Super Guarantee = (Earnings)0.095

For those who like maths and formulas less, if you earn $100,000, you would take home $100,000 (before tax) and your employer would contribute $9,500 into your super fund making your full salary package $109,500.

How Does Super Work?

Super works in a similar way to a savings account but with key differences. Unlike a savings account, your super fund will invest your super to get higher financial returns for you. For example, Australian Ethical’s ‘Balanced’ investment option has ‘a return target for 2019-2028 of 3.5% per year above inflation, after fees and taxes’ (Australian Ethical 2020). This generally means your money will be invested in a number of different assets, some which have a higher financial return called ‘growth assets’ and some which have a lower expected financial return called ‘defensive assets’. Common ‘growth assets’ for super funds include Australian & international shares, property and infrastructure. These assets are generally higher risk and and have greater price fluctuation meaning the price goes up and down with less predictability however typically produces greater long-term financial returns. Common ‘defensive assets’ for super funds include cash and fixed interest investments such as government bonds and bank deposits. These assets are generally lower risk and provide a smaller, but more predictable financial return. Most super funds have different investment options which gives you different ‘mixes’ of growth and defensive assets. For example, Christian Super’s default investment option ‘My Ethical Super’ has a 72%/28% growth/defensive asset allocation, it’s ‘Ethical Stable’ option has a 34%/66% allocation and it’s ‘Ethical High Growth’ option has a 95%/5% growth/defensive allocation.

The other key difference is that super gets favourable tax treatment compared to normal income. Super contributions are taxed at 15%, or more accurately 15c per $1, which is lower than all Australian income tax rates of 19%, 32.5%, 37% & 45%. This also means that if you ‘salary sacrifice’ and pay more of your income into super, it’ll be taxed at the 15% super tax rate instead of the higher income tax rate. There are a few exceptions to the above rates. For more information, take a look at the Australian Taxation Office’s ATO: Tax on contributions page.

However just like banks, super funds also charge fees. Typical fees may include: administration fees, investment management fees, performance fees and other fees such as an advice fee or investment switching fee. Fees can have a large impact on your superannuation balance as apart from market volatility, they are the biggest thing that can reduce your balance. High fees don’t always mean low returns and may infact produce higher returns. Each fund is different and you should get financial advice to properly understand the impact a fund’s fee structure will have on your superannuation.

Super & Climate Change

In 2019, Australians had a staggering $AU 3 trillion in superannuation assets (ASFA 2020). To put that in perspective, Italy, the world’s 8th largest economy, had a GDP of $AU 2.9 trillion (IMF 2019) in the same year meaning the value of Australia’s superannuation assets are greater than the value of the world’s 8th largest economy. It’s a staggering amount of money and the way it’s invested has a significant impact on the Australian and international financial systems and climate change.

The Sydney Morning Herald reported in this article that Australia’s 4 largest industry super funds, ‘UniSuper, Hostplus, HESTA and AustralianSuper have significant investments in the global coal, oil and gas sectors…’ which represents billions of dollars of investments.

Market Forces, in their ‘Out of Line, Out of Time’ campaign, found that Australian super funds had $175 billion invested in 22 of the most environmentally destructive companies in Australia and on top of that $165 billion invested in BHP which has not yet released its plan to align with the Paris Agreement. They also found that ‘ANZ, Commonwealth Bank, NAB and Westpac have loaned almost $7 billion to these ‘Out of Line’ companies since 2016′ (Market Forces 2020).

Thankfully, there is a lot happening to make sure Australia’s superannuation funds manage our money responsibly and take climate change and other humanitarian causes seriously.

Before we look at these companies, we’ll go through what makes a super fund ethical and how their financial returns stack up against less ethical super funds.

What Makes a Super Fund ‘Ethical’?

Ethical Statements

To guide how they will invest their member’s money, ethical super funds generally publish an ethical statement. An ethical statement outlines the ethical positions a will take when deciding which companies and organisations to invest in. At an ethical super fund, every investment is screened against it’s ethical charer and ethical positions. Here are a few examples of Ethical Statements – Australian Ethical, Christian Super & Future Super.

There are 2 types of screening that happens in this process: positive screening and negative screening.

Positive Screening is when a super fund actively seeks out companies and organisations that align with a particular set of values or activies. For example, Future Super lists a number of areas they actively seek out and positively screen for including renewable energy, recycling, resource conservation & social infrastructure (Future Super 2020).

Negative Screening is when a super fund decides to exclude a company from its investment portfolio for a particular reason. For example, Australian Ethical ‘[does] not invest in native or old growth forest logging’ (Australian Ethical 2020) so any company that engages in this practice will not be included in Australian Ethical’s investment portfolio.

Ethical Investing

Ethical investing is the process of making financial investments with economic, social, political, environmental and other similar factors in mind. Despite sounding relatively straightforward, there are a number of different ways that funds can invest to have a positive impact. For example, Future Super’s ethical investment philosophy places a strong emphasis on positive screening, particularly the funding of renewable energy infrastructure projects. Australian Ethical engages in an approach known as ‘shareholder advocacy’ where some of their funds are invested in less ethical companies so they can use their power as shareholders to influence the company to take more ethical positions. Christian Super’s emphasis is on impact investing. They state that ‘impact investing refers to investments “made into companies, organisations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return”’ (Christian Super 2020). For example, Christian Super invests in Soapbox, a company that donates a bar of soach to people in poverty for each bar of soap they sell. Christian Super (2020) reported that ‘In 2018 alone, [Soapbox] donated over 60,000 bars of soap, 20,000 months of clean-water capability, and 20,000 years of vitamin supplements. This… has impacted countries from Thailand and Kenya to Ecuador and Haiti.’ Whilst all of these lead to more ethical outcomes, the methods through which money is invested ethically are notably different.

Which Super Funds are Ethical?

Many super funds have ethical products or options whilst keeping the majority of their funds exposed to fossil fuels and unethical investments. Whilst this may appear to be a positive step, it’s really a form of ‘greenwashing’ which is a worrying practice that needs to be stamped out. You can read more about greenwashing here.

Thankfully, the following super funds have risen to the challenge of ethical investment.

Australian Ethical Super

Website: Australian Ethical

Ethical Credentials: BCorp, RIAA Certified, Signatory: Paris Pledge for Action.

Ethical Specialisation: Shareholder advocacy.

Christian Super

Website: Christian Super

Ethical Credentials: RIAA Certified, Signatory: Operating Principles for Impact Management, Signatory: Paris Pledge for Action.

Ethical Specialisation: Impact investing – 10% of funds are dedicated to impact investments.

Future Super

Website: Future Super

Ethical Credentials: B Corp, RIAA Certified.

Ethical Specialisation: Renewable energy investment.

Active Super

Website: Active Super

Ethical Credentials: RIAA Certified, Signatory: Paris Pledge for Action.

Conclusion

By switching to an ethical superannuation fund, Australians have a huge opportunity to help stop climate change and stop human rights abuses and exploitative practices both in Australia and around the world. The opportunity is so great that ‘just 7.7% of Australia’s total superannuation balance could fund Australia’s transition to 100% renewable energy’ see: Supercharging Australia’s Clean Energy Transition (2018). As a bonus, the Responsible Investment Association Australiasia (RIAA) showed ‘Australian super funds that comprehensively engage in responsible investment are, on average, outperforming their peers over 1, 3 and 5-year time frames’ (RIAA). As a sign of hope, the New Zealand Government announced this year that from mid-2021, KiwiSaver’s default options (KiwiSaver is NZ’s equivalent of super) must not invest in ‘fossil fuel production companies’ (SBS 2020). By moving to an ethical super fund, you will not only be doing a huge favour to the planet but be using your money for good.

Please Note… this article has general guidance on ethical superannuation and should not be used as financial advice. If you’re after financial advice, consider contacting an ethical financial services organisation.

Disclosure Statement… the author of this article, Nathan Linton, is a member of Australian Ethical however does not receive any direct financial compensation or other non-monetary benefit as a result of this article from Australian Ethical or any organisation or fund mentioned in this article.

Find Out More…

Check out Go Ethical for more ways to live ethically and sustainably.

Reports

Supercharging Australia’s Clean Energy Transition (2018)

Organisations

Responsible Investment Association Australasia (RIAA)

Books

Note: Maintaining a website is expensive! To help cover the costs, links marked with an (*) contain affiliate links. That means if you choose to make a purchase after clicking the link, I may receive a small commission at no additional cost to you. Thank you for your support!

* Doughnut Economics: Seven Ways to Think Like a 21st Century Economist – Kate Raworth

* How to Talk About Climate Change in a Way That Makes a Difference – Rebecca Huntley

References

Credit Suisse 2018, ‘Global Wealth Report 2018’, https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/global-wealth-report-2018-us-and-china-in-the-lead-201810.html

Organisation for Economic Cooperation and Development (OECD) 2020, Greenouse Gas Emissions: Total Emissions including LULUCF, tonnes of CO2 Equivalent, Thousands 2017, OECD.Stat, https://stats.oecd.org/Index.aspx?DataSetCode=AIR_GHG

Kilvert, N 2019, ‘Australia is the World’s Third-largest Exporter of CO2 in Fossil Fuels, Report Finds’, Australian Broadcasting Corporation, https://www.abc.net.au/news/science/2019-08-19/australia-co2-exports-third-highest-worldwide/11420654

Toscano, N 2020, ‘Australia Tops Qatar as World’s Biggest LNG Exporter’, Sydney Morning Herald, 6 January, https://www.smh.com.au/business/the-economy/australia-tops-qatar-as-world-s-biggest-lng-exporter-20200106-p53p5h.html

World Wildlife Fund 2018, Now is Our Chance to End Animal Extinction, https://www.wwf.org.au/get-involved/stop-australias-extinction-crisis#gs.139qr5

Seeto, T 2020, ‘What Fees Do Australian Super Funds Charge?’ Canstar, https://www.canstar.com.au/superannuation/fees-explained/

Association of Superannuation Funds of Australia (ASFA) 2020, Who is ASFA?, https://www.superannuation.asn.au/about-asfa/who-is-asfa

International Monetary Fund 2020, Report for Selected Countries and Subjects, https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD

Grieve C 2020, ‘Super Giants Funnel Billions Into Fossil Fuels, Vote Down Climate Push’, The Sydney Morning Herald, 13 February, https://www.smh.com.au/business/banking-and-finance/super-giants-funnel-billions-into-fossil-fuels-vote-down-climate-push-20200211-p53zt1.html

Market Forces 2020, ‘Out of Line, Out of Time’, https://www.marketforces.org.au/campaigns/super/outofline/

Soapbox 2020, Home, https://www.soapboxsoaps.com/

Watson, B 2016, ‘The Troubling Evolution of Corporate Greenwashing’ 21 August, https://www.theguardian.com/sustainable-business/2016/aug/20/greenwashing-environmentalism-lies-companies

Australian Ethical 2020, https://www.australianethical.com.au/

Christian Super 2020, https://www.christiansuper.com.au/

Future Super 2020, https://www.futuresuper.com.au/

Local Government Super 2020, https://www.lgsuper.com.au/

Certified B Corporation 2020, Australian B Corp Directory, https://www.bcorporation.com.au/directory-australia

Responsible Investment Association Australiasia (RIAA) 2020, RIAA Members Directory, https://responsibleinvestment.org/directory/

Operating Principles for Impact Management (OPIM) 2020, Signatories and Reporting, https://www.impactprinciples.org/signatories-reporting

Paris 2015 UN Climate Change Conference COP21.CMP11, Who’s Joined, Pledge for Action, http://www.parispledgeforaction.org/whos-joined/

Teske et al. 2018, ‘Report: Supercharging Australia’s clean Energy Transition: How Just 7.7% of Super Could Fund 100% Renewables by 2030’, https://www.uts.edu.au/sites/default/files/article/downloads/Teske_et_al_2018_Supercharging_Australia%E2%80%99s_Clean_Energy_Transition_0.pdf

Responsible Returns 2020, ‘How do Responsible and Ethical Investments Perform?’, Responsible Investment Association Australasia (RIAA), https://www.responsiblereturns.com.au/responsible-and-ethical-investments-perform

Special Broadcasting Service (SBS) 2020, ‘NZ Directs Super Away From Fossil Fuels’, SBS News, 1 March, https://www.sbs.com.au/news/nz-directs-super-away-from-fossil-fuels