Screening out fossil fuels strengthened FY24 returns, say ethical funds

Future Group, which manages over $15 billion in funds under management, has credited a responsible investment approach for the strong results delivered by two of its ethical superannuation funds.

The group currently consists of five superannuation brands, namely Future Super, smartMonday (which it acquired from global insurer Aon in 2022), GuildSuper Services, Child Care Super, and Verve Super, which it formally welcomed into the fold in November 2023. 

In the year ended June 2024, the group announced Future Super’s Balanced Index option delivered an annual return of 10.1 per cent while Verve Super returned 9.9 per cent.

Elaborating on the results, Future Group’s executive director of investments Sharon Davis said screening out fossil fuels helped the fund allocate more to high-performing sectors like technology in the last year.

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The two super funds employ a negative screening approach of screening out fossil fuel companies as well as gambling, tobacco, and weapons companies, an approach that allows the funds to allocate more than the benchmark to other sectors, like technology.

“Our returns are built on a foundation of responsible investing, avoiding fossil fuel companies means we have more space to embrace other, growing sectors like tech, AI, health and renewable energy,” Davis said.

“Locally, the fossil fuel sector was not a strong performer this year, while globally the technology sector, benefiting from the AI boom, performed exceptionally well.” 

Notably, the fossil fuel-intensive energy sector in Australia underperformed the ASX 300 this financial year, with the sector returning -1.0 per cent against the ASX 300’s 11.9 per cent.  

Meanwhile, the artificial intelligence-driven tech boom far outweighed fossil fuel investment performance.

“While politicians may equivocate from time to time on climate action, markets continue to take a long term view on the inevitability of the transition away from fossil fuels,” Davis said.  

She also said the funds hold overweight positions in clean energy infrastructure and private credit relative to traditional unlisted investments like commercial real estate and maintain “a limited exposure” to commercial property.

“Our focus is on assets with high growth potential and sustainability impact,” she said.

“Our focus on impact investments is evident in our material exposure to private credit loans for solar farms and battery projects over unlisted property. Global investment in clean energy is at an all-time high, set to reach USD $2 trillion this year.

“Our members are well-positioned to benefit from this global movement.”

Earlier this week, research house SuperRatings estimated that the median balanced super fund would return 8.8 per cent for the financial year. It observed international shares were the standout performers for funds, with the sector estimated to return 17 per cent as an AI rally, and associated industries saw a small group of shares hit unprecedented highs.

Additionally, Australian shares made a strong contribution to super fund returns, it said, with an estimated 11 per cent return for the sector.

Unpacking this strong performance, SuperRatings said technology shares in the US, and bank shares in Australia, have “really driven” this year’s outcomes.