Recession rumbles grow: Is ethical superannuation a safer retirement bet?

How safe is your superannuation? Image: Getty
How safe is your superannuation? Image: Getty

Following a series of vertigo-inducing stock market dips, warnings from former Prime Ministers and a seemingly endless international trade war, concerns that a recession is looming are at fever pitch.

The global financial crisis wiped $64 billion off the Australian share market, affecting millions of Australia’s superannuation savers.

Now, questions turn to how to protect your superannuation should Australia suffer a recession in the near future.

While ethical superannuation funds have been largely untested in times of financial strife, due to only recently having appeared in the mainstream investing space, they could present a safer path through an economic downturn, the executive director or research at Rainmaker, Alex Dunnin told Yahoo Finance.

“Environmental, social and governance led [ESG] investing is quite new and we don’t have much hard historical evidence to judge how they’ll handle a recession,” Dunin said.

“But another way to look at this is to consider what they are actually investing into and how these underlying investments will go should we enter into a recession.

“For example, ESG options invest a lot into alternative energy and we know how popular these energy solutions are becoming. Same goes for innovative technology companies and other types of social ventures and ‘impact’ projects they invest into.”

However, ESG investments also tend to have smaller exposures to resources stocks that have been performing strongly recently.

“But regardless of these issues we should remember that ESG is fundamentally about governance, transparency and factoring in long-run risks. In theory this should equip these funds very well to withstand any recession.

“Another perspective is that if ESG funds have performed well in the past few years then it stands to reason that good performance was no accident and they will also perform well should Australia enter recession. In other words, why would a fund that has been successful up until now suddenly stop being successful?”

What about market performance?

Here, the plot thickens.

Ethical funds in 2018 returned 1.2 percentage points more than the regular ASX index in 2018-19 and over the last 10 years, the MSCI ESG index out-performed the ASX by 0.6 per cent.

However, over five years the ESG index returned 1.1 percentage points less.

“This means the ESG investments have a good short and long run performance story but over the medium term the evidence is mixed,” Dunnin said.

“At face value this means a lot of super funds and investment managers last financial year did not earn the fees they are charging them. This under-performance isn’t just a short run thing, it’s also very observable over three years.”

What does this mean for me?

It means Australians need to consider whether their super fund is doing what they want, the chief investment officer at NGS Super, Ben Squires said.

That might mean moving into an ethical investment option within their fund, or looking at another fund altogether. It could also mean sticking with the fund that they’re with, confident in the knowledge that it’s doing what they want.

“The primary reason an investor (people) should choose an investment option relates to a time period and risk tolerance. However, we know that people are far from rational and ultimately make investment choices for a variety of reasons unrelated to time and risk tolerance and may also be related to preferences such as control, ethical views, or costs,” Squires told Yahoo Finance.

Most individuals rely on their super fund to make the decision around investment choice by electing the default fund. By virtue of a fund nominating a default option for its members, it is assumed (rightly or wrongly) by the vast majority of investors that this is the best option available.

“As a result, many superannuation funds have introduced lifecycle investment strategies which aim to address differing time horizon and subsequent tolerance to risk. These products are far from perfect as they are modelled off large population groups and use the law of averaging to determine the exposure to risk which is typically based on age and sometimes account balance.”

The reality is different though, he said.

Every investor will have different circumstances, meaning the default fund may not be the best option.

Funds that take a long term approach to investing and consider all risks are more likely to deliver sustainable returns over the long term opposed to those applying rigid rules-based approach or discounting longer term risks such as climate change,” Squires said.

“Understanding how your super fund thinks about ESG risk will provide some insight into the degree of consideration made in this area.”

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