Letter from Australia: super funds sanguine on US-led ESG pullback

Over the past two years, the Global Environment Opportunities Fund, the ‘greenest’ investment option to be offered by a leading Australian super fund to its members, has lost nearly half of its assets under management. 

The fund, managed by the A$140bn (€80.9bn) UniSuper, had AUM of A$2.5bn in 2023 and closed last year at A$1.4bn. Its return was minus 3.1% for the 12 months to end-December – the third consecutive negative annual return. 

A spokesman for UniSuper told IPE the reduction in AUM over the 12 months to 31 December 2024 was due to performance and outflows. 

“Returns over the 12 months to 31 December 2024 were impacted by the US election result which raised uncertainty about the speed of the energy transition. We saw weakness in renewable stocks associated with solar and wind power, some Chinese stocks, and electric vehicle and battery manufacturers were also weak,” he says. 

Rising anti-ESG sentiment 

The poor performance of the UniSuper fund is symptomatic of the issues challenging responsible investment – which have been partly blamed for contributing to the rise in anti-ESG sentiment globally. 

Overall, growth in funds dedicated to responsible investment has largely flatlined both locally and globally for the last 12 months, says Dugald Higgins, head of responsible investment and sustainability at Zenith Investment Partners, adding: “Sustainable investment by super (funds) is also largely flat.’’ 

The UniSuper’s green fund had 95% of its assets invested in international shares and of this, almost half was in US equities. Indeed, UniSuper and its peers have increasing exposure to – and reliance on - US listed and private markets.  

A report commissioned by the Melbourne-based global asset manager, IFM Investors, which was released this month, says Australian super funds, which have US$400bn invested in the US, will more than double that amount to US$1trn over the next decade. 

Unsurprisingly, the shrill anti-ESG rhetoric of the Trump administration has reverberated across Australia’s superannuation sector.  

But the Australians are a sanguine lot. 

“Good investors think long term and in the case of the US well beyond a four-year presidency,” says Estelle Parker, chief executive of the Responsible Investment Association of Australasia. 

“A 20-year-old opening their first superannuation account today will retire after 2065. Long-term thinking allows portfolios to consider long-term trends, benefit from compound interest, ride out short-term volatility, and avoid reactionary decision-making. Regardless of who is in the White House, the global transition to a low-carbon economy continues, and investors remain focused on managing risks and opportunities that will shape the decades ahead,” says Parker. 

Sounding out US opportunities 

In March, a high-powered delegation of superannuation fund executives, backed by Macquarie Group and IFM Investors, held an investment summit in the US. They went there to read the market and to make it known that Australia’s A$4.2trn ‘patient capital’ (retirement savings) is looking for a home. 

They landed in the US mindful of a rollback in climate-related initiatives and the demise of Joe Biden’s Inflation Reduction Act (IRA), which helped kick-start a huge number of green projects that appeal to Australian super funds. 

One of the delegates, Mary Delahunty, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), told IPE: “There was a lot of discussion about the funding of projects that could have been helped by the IRA. It would be disappointing to see that change. There is such an enormous opportunity in the US in infrastructure and energy transition. 

“Energy transition assets have been funded partly through the IRA, and they are largely in the Republican states so my hope is they can make good representation to the administration to continue with those projects. Australian super funds stand ready to invest in worthwhile projects in the US. They are well experienced in real assets infrastructure management.” 

However, notes Delahunty, many decarbonisation assets are held by the states at the municipal level. “We had meetings with state governors about their plans to deal with their infrastructure assets and shortage of funding. They are not reliant on the federal government. Rather, they raise debt and capital for their projects. We see the US as an incredibly strong market.”  

Decarbonisation drive continues

Higgins says global climate action has evolved significantly since Trump’s last term, and the momentum for decarbonisation is far broader and deeper than in 2016. 

Last year alone, weather and climate-related disasters caused more than US$1bn in damages across America. The frequency and scale of events are rising rapidly, up 10-fold in the last 45 years, with most of the increase witnessed in the last 20. “Real-world events drive real-world responses. This will drive the opportunities. Critical environmental and social issues don’t care about political spin cycles,” he told IPE. 

Parker acknowledges that the political environment in the US has made it tricky for some investors. While some investment managers or banks may withdraw from specific initiatives due to political or economic pressures, they’re still working to address long-term climate risks in other ways. 

Organisations may be changing the way they talk about their sustainability goals, but they are not walking back from their fiduciary duty (i.e. legal obligation) to act in the best financial interests of clients; today, this requires considering the impact of ESG factors on investment decision-making, she says. 

Parker says ESG is fundamentally about risk management. Just as no investor would fund a beachfront hotel without considering rising sea levels, responsible investors assess ESG (environmental, social and governance) factors to understand and manage financial risks and identify opportunities. 

Superannuation funds have a fiduciary duty to consider long-term risks, including climate change and biodiversity loss. Ignoring these risks would be poor financial management.  

While there is no evidence of super funds turning away from ESG, Delahunty says: “There is some hesitation to use the ESG acronym today. If we break it down into its core components – environmental, social and governance – there are a lot of investment opportunities and value that can come from investing in decarbonisation, diversity or social stakeholder matters. So, at its core the concept of ESG is now mainstream.”  

ESG as a tool 

Higgins says most funds simply treat ESG as a tool to help make better investment decisions. “This is different from other values-based parameters like ethical screening or pursuing sustainability. With that said, super funds recognise there is pushback by some counterparties on ESG. 

“As long-term universal asset owners, the funds are very aware that they can’t diversify away from material risks to members’ savings by ignoring ESG issues,” he says. “ESG can also be a valuable tool to identify new opportunities, which is critical. We might see lower disclosure for a time, which was something of a feature last year as funds reframed due to greenwash threats.” 

Delahunty sees no sign that superannuation funds are not committed as ever to doing good business and cost externalities. “What we might see is if there is a change of intention in some jurisdictions to report on those externalities, then the cost becomes more difficult to count. 

“If, for example, there is a lessening of reporting on environmental or decarbonisation initiatives, then it will become more difficult for portfolio holders to understand how the companies within their portfolio are decarbonising,” she says. “So, it is not a lack of intent on the investors’ side to continue to pursue opportunities and understand the risk in the environmental context, but it may become more difficult to do so if reporting is not transparent.”