Superannuation: the growing gateway for conscious investors
Author: Sunny Lin | Communications Officer
When you think of investing, you might first think of the glitz and glamour akin to The Wolf of Wall Street, a world where investors thrive off the high risk thrill of the stock market roller coaster. Beyond the theatricals, the world of investing offers us something else: opportunity. Especially for the socially-aware worker, investments bring the opportunity to ‘vote with their feet’, a means of voicing an opinion by ceasing support of a particular organisation or industry. As companies and start-ups increasingly place more importance on corporate social responsibility, so too should the young investors of today’s world. No longer is social awareness within companies a mere ‘PR stunt’. Today, investors have the opportunity to actively invest in growing industries such as renewable energy or green property, and depart harmful industries such as tobacco and coal.
For many problems, deciding how to behave ethically is a complex, time-consuming and often unresolved process. Thus, instead of musing on moral philosophy, this piece adopts a straightforward definition of ethical investing as used by the Responsible Investment Association of Australia, comprising environmental, social and corporate governance responsibility. The main point I would like to convey is that everyone has the opportunity to make a social impact through superannuation, especially the young investor.
Why superannuation?
In the past, superannuation has been the overlooked little brother, where people favour its older siblings of the investment family: security trading and property investments (to name a few). However, superannuation has far matured in recent years to stand proudly alongside its siblings. Figures from the Australian Prudential Regulation Authority (APRA) showed that superannuation assets totalled $2.7 trillion at the end of March 2020. To put this huge figure into perspective, the Australian Stock Exchange (ASX) had a total market capitalisation of around $2 trillion at the same time.
Clearly then, superannuation assets are one of the largest financial pools in Australia, and will only continue to grow. Australia currently has a super guarantee (SG) of 9.5%, indicating the amount of an employee’s ordinary time earnings (OTE) - simply, the amount employee’s earnings for their ordinary hours of work – that must be contributed to their super account by their employer. SG has been frozen at this rate since July 2014, but from July 2021, will incrementally increase to 12% by June 2026. Additionally, with new legislation incentivising retirement savings, such as the recent carry forward rule where employees can bring forward unused cap space to make larger concessional contributions to super, it is not hard to see that the pool of funds in superannuation has a healthy supply of future inflows.
Source from (https://www.corporatecomplianceinsights.com/esg-initiatives-value/)
Your super decisions shape the future of our economy and society
Take a moment to think about the world you want to live in. Your super choices, compounded with those of all working Australians, can be incredibly powerful in influencing the way industries evolve.
Deloitte modelling showed that within the next 20 years, superannuation funds will own nearly two-thirds of the Australian share market. Thus, the allocation of these funds to certain sectors, industries and companies is highly influential. For the young investor looking to invest their money in a socially responsible manner, superannuation is the perfect platform for them. Especially under the weight of university debt or small part-time job salaries, taking the time to invest ethically can seem like a task that requires high effort, yet produces minimal impact.
However, investing through superannuation is different. Simply opting to allocate your superannuation portfolio in an ethical investment option allows the industry superfund that you are with to conglomerate funds collectively into socially responsible industries. Combining your super with many other like-minded investors in Australia can create substantial impact on responsible and socially-aware industries. By doing so we can collectively build a strong voice as responsible investors to influence policy and company regulations. ‘Voting with your feet’ is a powerful way of supporting sustainable capital markets and long-term responsible investment.
This growing commitment to responsible investing is a mindset shared by many superannuation funds. In Australia, four funds currently claim to be completely ethical, with many other funds providing socially-aware investment options for their investors. Funds such as Australian Ethical, have declared that they will not invest in activities that harm people, animals, larger society or the environment. Thus, supporting these types of super funds is a way of rejecting industries that abuse human and animal rights, or use fossil fuels. Instead, these ethical funds actively invest in positive industries such as renewable energy, recycling, education and healthcare. Even if they are not completely ethical, the biggest funds in the Superannuation game also provide ethical alternatives. One such example is Australian Super (not to be confused with Australian Ethical), who offer a ‘Socially Aware’ option that voids any companies that directly handle reserves of fossil fuels or uranium.
In recent years, these gateways to responsible investing present the perfect opportunity for young Australians to govern their own funds in ways that align with their own values. Indeed, the idea of making the world a better place has always been an appealing pitch. A generation of conscious investors would be a formidable sight: being able to influence capital markets by aligning their investments with what they deem as important or ‘ethical’. On a large scale, they could shape future industries and corporate governance responsibilities. For the young investor, superannuation provides them with that opportunity to make such an impact.
The power of being on top of your super as a young person
“Sure, I understand that superannuation is important, but I’m too young to worry about that now. I’ll think about it when I’m closer to retiring.” This is a commonly shared thought amongst young investors. However, as the cliché goes, investing is like growing an apple tree; only constant care and time will lead to ripe and bountiful rewards. Superannuation is the apple tree that will support your retirement lifestyle. A healthy apple tree can support relaxing vacations and new hobbies. However, lack of care for your superannuation at a young stage of your working career may force you to retire later, sacrifice aspects of your retirement dreams or draw down on your assets. Everyone wants a ripe sweet apple, not a rotten one.
Moreover, funding for retirement plays an important role in indirectly affecting the wellbeing of future generations. The need for superannuation is fuelled by a few reasons, one of the main ones being the ageing population. In 2017, over one in seven Australians were over the age of 65. With the ratio of workers to retirees declining, larger stress will be placed on the working population to fund the pensions for retirees. As higher taxes are imposed to fund these pensions for the vulnerable elderly, some Australians could be enticed to find work in other countries, leaving a larger taxation burden on the remaining labour force and negatively impacting the elderly who rely on the pension. As you can see, a downward spiral occurs with poor retirement planning.
Super decisions you can make now
Surprisingly, most students with a superfund may not even realise that their current fund has an ethical alternative. With just a few clicks on the online pages, we can access a plethora of investment options and products. The transparency of super funds also allows details of their ‘ethical’ view to be found effortlessly through the web.
The Responsible Investment Association Australasia (RIAA) also provides help in sorting through these arrays of superfund products. In their annual reports titled ‘Super Study’, they evaluate the quality of responsible investing by super funds and reward these funds with the accreditation of being ‘RIAA certified’ if certain ethical quotas are met.
Therefore, for the young investor, our actions affect not only our own lives, but also those of future generations. There are many actions that new entrants to the labour force can consider when it comes to their retirement planning.
Examples include:
Being aware of superannuation – As people progress through their careers, they may tend to forget or overlook superannuation until it is too late.
Understanding how superannuation works – It’s important to know how the system that holds 9.5% (to 12%) of their working life income works.
Knowing the difference between superannuation fund options – Understanding which fund is most suited to your needs and values.
Rebalancing your portfolio – It’s important to rebalance your super portfolio to your risk profile.
Considerations
As with any decision, it is always important to do your own thorough research. Fees and other benefits that may be given up should also be taken into account before making an investment switch. Most ethical alternative options in a superfund usually have higher fees than the typical MySuper options. This occurs for two main reasons:
Remuneration for the comprehensive research completed for these alternative options.
Ethical funds tend to have less members than the more established funds due to how new they are. This means ethical fund managers cannot yet leverage a larger member pool to lower investment fees.
Of course, the fee structure will vary with each superfund and some actively-managed options may even be more expensive than their ethical alternative. Even with possible higher fees, future return is also a key factor. Responsibly invested funds are placed into sectors that provide sustainability and strong future capital markets, such as renewable energy. Furthermore, some sectors also provide sheltering from the business cycle. Industries such as education and healthcare fluctuate less with the booms and troughs of the economy’s business cycle, presenting possible defensive assets that diversify an ethical portfolio of growth options, such as green property.
Another consideration is that many funds use terms such as ‘socially-aware’ or ‘ethical’ to describe their funds. Before you reallocate, it is important to find out exactly what you will be investing in, rather than being drawn in by these buzzwords. Luckily, super funds are extremely transparent in their investment options and will disclose what they deem as ethical in their investment choices, meaning all you have to do is find one that is right for you. Additionally, resources such as the RIAA also provide a credible benchmark for the responsible investing done by super funds.
Bottom line
Through long-term markets and responsible investing, future industries can be shaped to progress our environmental, societal and corporate governance impact. The idea of making the world a better place is an important one, albeit idealistic, that can be motioned through a generation of conscious investors. For new entrants to the workforce, limited funds and debt can be a huge disincentive to investing for social impact. Luckily, superannuation provides the tax-effective platform for many young investors to invest ethically, without the need for scrutinisingly in-depth research or cumbersome calculations that come from investing independently.
Superannuation is an under-utilised investment opportunity that, while easy to ignore, has incredible potential to shape our economy and society. As B.C Forbes (founder of Forbes magazine) said: “It is only the farmer who faithfully plants seeds in the Spring who reaps a harvest in Autumn.”