A decade ago a fresh wave of interest in sustainable investing broke out in Australia - and elsewhere - but things have not turned out quite as expected.
Howard government reforms to allow choice of fund would allow anyone with super to decide how their money was invested. This would translate into greener, more human financial markets. Mainstream institutions like Westpac, AMP and Perpetual launched funds into a market niche - call it ethical, socially responsible or sustainable investing - that had been held by specialists like Australian Ethical Investments and Hunter Hall. Real money was expected to flow into this niche, then worth about $1.4 billion.
Big companies like BHP may not have cared what a few tiny green fund managers did with their money, but failure to pass a sniff test backed by powerful institutions with billions to invest posed a different reputational risk. After the Dow Jones Sustainability Index was launched in 1999, for example, everybody wanted to make the cut.
But the fund managers had a problem: how to offer investment-grade sustainable funds that conformed with industry rules about diversification? Get too green, you limit your investment options. No trustee or their consultant would endorse a fund likely to underperform. Not green enough, you get shot down for hypocrisy and lose your marketing edge as well as any possible upside from green investing.
A crop of funds were launched that balanced performance with integrity to varying degrees. Slowly money trickled in, except those with superannuation almost never chose the sustainability option. Most mandates were wholesale.
By the end of last year, says the managing director of SuperRatings, Jeff Bresnahan, take-up of the sustainable options offered by super funds was "pitiful".
A recent SuperRatings survey answered by 76 funds with 15 million members and $370 billion in assets found that for 90 per cent of respondents, sustainable investments represented well under 5 per cent of net assets.
Vision Super, a $4 billion fund, had just $8.5 million invested in its sustainable options. The massive $28 billion Australian Super had just $29 million invested in its comparable green plan - that is only 0.1 per cent.
"People just aren't voting with their feet with [these] options," Bresnahan says. "A lot of funds have done the research among their members, and it comes back with a resounding 'yes', but there's very little take-up."
It is not the performance that is a turn-off. Sometimes they are ahead, sometimes behind, depending on the period, asset allocation, research and so on.
SuperRatings found sustainable super options underperformed by a measly 33-38 basis points a year over the five years to the end of May, with the median option delivering annual returns of 4.37 per cent (balanced) or 6.72 per cent (shares) after tax and fees.
Preliminary SuperRatings figures last week showed the median balanced fund lost about 13 per cent in 2008-09, the worst performance since compulsory super was introduced in 1992. When the final figures arrive there is no reason to expect the relative performance of sustainably invested funds will be much different.
Morningstar data for retail (non-super) funds shows a similar underperformance of 45 basis points a year over the five years to May. That is also after fees, which is part of the explanation - the added research required to analyse sustainable investments costs fund members 1.81 per cent, or an extra 21 basis points a year, more than mainstream funds.
Phillip Gray of Morningstar says the performance of the ethical funds is similar because the Australian market is small and fund managers have limited ability to construct a different portfolio to the mainstream share funds. Crossover between the sustainable and "unsustainable" portfolios run by the same institution can be up to 90 per cent.
If the holdings, and therefore the performance, are basically the same, why bother? Most people don't, and the sustainable funds managed by the big institutions now find themselves somewhat stranded. The sector claimed about $15.7 billion was invested in these sustainable funds in June last year - a fairly static 2 per cent of total funds under management over the decade.
That does not mean the issues have faded away - on the contrary. What has taken off, encouraged by the United Nations Principles for Responsible Investment, now signed by institutions accounting for about half the Australian funds industry, is the integration of environmental, social and governance (ESG) issues into mainstream investment analysis.
"Maybe in five years' time everybody will be a sustainable investment manager," says David Carruthers, principal of the super fund advisers Mercer Investment Consulting. Every time Mercer analysts interview a fund manager now, the analyst asks how ESG issues are treated.
Trying to prove the link between sustainability and performance is passe, it seems. The onus of proof has flipped. "Don't ask me to prove that it's important," Carruthers says. "Prove to me that it's not important."
paddy.manning@fairfaxmedia.com.au
Barry FitzGerald's Garimpeiro column returns on July 20.
