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  • Nathan Fradley

Should I Go Sustainable with My Superannuation? A Simple Decision Framework


Responsible Super Yoga

Intended Audience: Anyone wondering if they should choose the Responsible Investment option.


Disclaimers

  • This is not investment advice as it does not take into account your situation or circumstances. Seek advice before making any changes to your Superannuation.

  • I mention and use Ethos ESG in this blog: I am a shareholder in this business and have the rights for distribution in Australia.


The Power of your Superannuation


Every day, we vote with our dollar—whether at the supermarket, clothing store, or online. For some, considering the impacts of the products they buy is important; for others, less so. The same applies to how you invest your superannuation. With more tools and product variety available than ever before, choosing a superannuation fund that aligns with your values can be both exciting and confusing.


So many terms!

When looking at superannuation options, you may encounter terms like sustainable, socially aware, ESG (Environmental, Social, and Governance), or impact investing. Additionally, you’ll see different types of funds (wrap, retail, industry, employer) and investment options (balanced, growth, balanced-growth, index, etc.), which can be overwhelming.


The Trifecta Model

To simplify the decision-making process, consider the trifecta model: Fees, Ethical Score, and Performance.


Assuming you cant have all three (as this is an exercise in priority), where in this trifecta would you place yourself, based on what is most important?

Ethical Trifecta



Fees

This includes the total cost to run your fund, encompassing administration and investment costs. It’s also crucial to consider advice fees, as they can significantly impact your overall costs.


Ethical Score

This score reflects how well the fund meets your ethical needs. There are various tools available to assess this:

  • Ethos ESG

  • RIAA Certification level

  • Lonsec Bees

  • Morningstar Globes


Performance (Long Term)

Look at the investment option’s performance over extended timeframes, ideally seven years. Superannuation is a long-term investment, even in retirement, so long-term returns are critical. Ensure you compare:

  • Returns over the same timeframe

  • Returns before or after fees

  • Avoid reports that cherry-pick data or use back-testing

Don't Responsible Investments perform worse?

There is a misconception that Responsible Investments underperform relative to their counterparts. This has been repeatedly shown to be untrue, however we do know that when investing responsibly, you can end up with a different assortment of investments, that are impacted differently by world events.


As a comparison

·       During COVID Healthcare and Technology businesses boomed. These are two themes commonly held in Responsible investments and so they outperformed.

·       During 2022, when Russia invaded Ukraine, Oil prices jumped and weapon sales increased. Oil and Weapons tend not to be in Responsible investments, so your


Applying the Trifecta Model

Consider where you would place yourself on the trifecta model. Then, evaluate your current fund and compare it with other options. Here’s a real-life example comparing three different funds with $500,000 in super:

Option

A

B

C

Total Fees

$4,102.00

$2,852.00

$454.00

Performance




5 Year

7.06%

7.70%

7.56%

10 Year

7.41%

7.61%

7.54%

Ethical Score

68

81

52

Asset Allocation

80/20

78/22

76/24

Key Takeaways

  • Option A: Standard ‘Balanced’ option, actively managed, higher fees, slightly worse returns net of fees.

  • Option B: Responsible ‘Balanced’ option, actively managed with ethical rules, mid-range fees, better returns net of fees.

  • Option C: Index ‘Balanced’ option, lowest fees, lowest ethical rating, passive management.


Which option would you prefer?


Passive Versus Active

There is a long running argument around whether passive or active investment is best, and its not something I will deep dive into in this blog. 


It is important to note that in adding Responsible Investment into the mix for, Active responsible managers have a lot more value to bring to the table for the higher fees, than just investment selection. They also engage with investments to drive better outcome through direct intervention or voting as shareholders and using their size and scale as weight.


In most of my conversations with clients on this topic, people usually get stuck between Lower fees (what they can control) versus Ethical consideration and what is most important to them right now.


In closing

There in no right or wrong answer when choosing between the above options, but the exercise can help quantify and clarify how much you value investing responsibly by making the costs real.


Reflect on where you sit in the trifecta model and decide which option aligns best with your values and financial goals. Considering what was discussed, or if you are still stuck, seek advice.

 

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