More Australians are embracing the idea of doing good while saving for retirement, but the devil, as always, is in the detail

Ethical superannuation: what is it, and does it actually work?

Ethical superannuation funds are on the rise.

Especially for younger Australians, the idea of putting your super into something that makes the world better – or at least not actively worse – is an appealing pitch.

These funds promise either positive action to invest in areas such as clean energy, or to not invest in sectors such as the arms industry (or both), all while growing your retirement savings. A 2017 poll conducted by the Responsible Investment Association Australasia (RIAA) found 80% of Australians would be willing to switch funds so their money is invested according to their values, and that rises to 88% among those aged 18-34.

Four funds in Australia currently claim to be fully “ethical” – Australian Ethical, Future Super, Local Government Super and Christian Super. Dozens of other funds provide “ethical” or “sustainable” options – including UniSuper, Sunsuper and Australian Super, the country’s largest.

In the past five years, Australian Ethical has nearly quadrupled the amount of super it manages, from $639m to $2.4bn. Future Super, which was a high-profile backer of the most recent school climate strike, has grown by 15,000 members since its founding in 2014.

But putting the word “ethical” in the name of a fund does not in itself tell investors much.

There’s no shortage of super tips floating around, but if you want to invest ethically there is a further layer of complexity to the decision about where to put your money.

Analysis from the consumer group Choice has found that some funds are not as ethical as they appear, and that in some cases it would be a better use of money to give it directly to the causes you support.

What exactly do we mean by ethical?

First, the definitions. There is nothing to stop anyone calling their fund “ethical”, “green” or “sustainable”. These are just marketing terms. If they are grossly incorrect, they can constitute misleading and deceptive conduct – but it’s a very high bar.

And “ethical” can mean anything from green energy to animal rights to bans on gambling and alcohol. There is no set definition.

The closest thing we have to regulation is accreditation from the RIAA.

The RIAA is a non-government body that promotes sustainable investment. When a fund volunteers to be accredited, the RIAA combs through its investments and very handily produces a searchable database of what it does and does not do.

Some of the largest funds’ “ethical” options – such as Australian Super’s – are actually not accredited, and thus won’t show up on the search, but others – including UniSuper’s – are.

RIAA accreditation is in-depth and rigorous but there are two things to keep in mind.

First, under RIAA rules, a fund can be accredited with “excluding fossil fuels” but still earn up to 20% of its revenue from fossil fuels.

It’s all in the fine print, and it varies from fund to fund. For example, First State Super’s “Socially Responsible” option only blocks companies that earn more than 20% of their revenue from coal, oil and gas. Other funds, such as Future Super, promise full, 100% fossil fuel exclusions.

Second, the RIAA does not impose any definition of “ethical”, other than a minimum standard that means every fund on its list must not invest in tobacco companies and armaments. Otherwise it simply does the work to check if a fund’s investments align with its value statement.

Not everyone’s ethics are the same

Some funds will care about labour rights or gender parity, others have radically different priorities.

Christian Super will not invest in anything that provides intra-uterine devices, abortion medication, or stem cell research – in according with its ethics, which are disclosed on the RIAA site.

“It’s about ensuring that investment products are delivering on what they are promising,” says the chief executive of the RIAA, Simon O’Connor.

“We don’t tell them at what point they draw the line but we get them to verify where they draw the line, disclose it in all their legal documentation, then we verify that.”

These nuances are mostly provided on the RIAA database. But for the most detail – and some of it can be crucial – you will have dig around on each individual fund’s website, and if it’s not there, call or email them.

For example, Australian Ethical will positively invest in aged care, as well as banning investments in coal, coal-seam gas and oil. VicSuper’s “Socially Conscious” option, by contrast, has no positive inclusions.

And finally, downstream investments also have to be considered.

A fund may divest from fossil-fuel companies, but still invest in a bank that then invests in fossil fuels; or it may invest in a shipping company that makes most of its profit moving coal.

Another example is supermarkets. Your fund may blacklist cigarette makers, but it probably invests in Coles and Woolworths, which sell cigarettes over the counter.

The RIAA does not by default investigate downstream investments. Again, if your fund promises to take downstream investments into account, the RIAA will check it – if not, it won’t.

The cost of ethics

There is a lingering question around whether super is the most effective way to drive change.

In September, the head of Hostplus said divesting from coal was “a waste of time” – because those shares would just be bought by other people. Instead, he advocated putting direct pressure on governments.

Xavier O’Halloran from Choice says that if your fund eats into your returns (either through high fees or just bad performance), you might be better off donating or investing that money direct to the cause.

“We found with some of these ethical funds the fees are pretty high compared to the market average,” he says. “You’ve really got to weigh up the returns you are getting compared to the fees.”

It’s easy to underestimate how much fees chip away at super. It’s the magic of compounding. An apparently negligible 0.8 percentage point difference in fees can add up to $123,000 less in super over a lifetime.

“On a purely mathematical analysis you might be better off going with a more traditional fund,” O’Halloran says. “Then you can make a contribution more directly.”

But O’Connor from the RIAA disagrees, pointing to the effectiveness of divestment from tobacco. “We have seen 35 super funds divest from tobacco in the past five years. And that has probably divested about $2bn from the industry. That is a massive, loud signal.”

• This story was amended on 28 October 2019. A previous version said Christian Super excluded companies earning more than 15% of revenue from thermal or brown coal. This was based on outdated information on the RIAA website. Christian Super now excludes any company that earns more than 5% of revenue from thermal or brown coal.