Australian Retirement Trust to shut down ESG fund after failing performance test

A major pension fund will close a key ethical fund after it failed the new Your Future Your Super test for choice products.

Australian Retirement Trust, the country’s second-largest pension fund, will shut down one of its key green and ethical funds after it failed the new Your Future, Your Super test for so-called choice products.

MySuper products have been tested since 2021 and the Albanese government this year extended it to also cover alternative options that funds design and that members choose instead of defaulting into a fund.

The Australian Prudential Regulation Authority on Thursday released the latest annual performance results showing 96, or 12 per cent, of all choice products tested, failed to meet their benchmarks.

Funds that fail the test two straight years must stop accepting new members.

“We are disappointed our QSuper Socially Responsible option failed the performance test,” the fund said in a statement.

Australian Retirement Trust boss Bernard Reilly. Picture: Dylan Coker/The Photo Pitch

The ESG-related option, which excludes fossil fuel investments as well as exposures to alcohol and gambling, lost 0.41 per cent in the 2023 financial year and was the only fund in ART’s stable that failed the test. Its performance was also impacted by a relatively higher exposure to commercial property in the U.S., where values have been hit by remote work and e-commerce.

The YFYS performance test takes into account factors including net investment returns, asset allocation, fees and costs. The option, in which 8,500 members have about $550m invested, returned 4.5 per cent over the past 9-years – the time horizon on which the test was based.

Funds that fail the annual test – by underperforming a government benchmark by 0.5 percentage points – must notify their members.

Industry groups have warned the test – administered by APRA – could discourage funds from reducing their exposure to coal and energy stocks as part of their ESG strategy for fear of failing the YFYS assessment.

The test is intended to encourage members to be more involved in their retirement savings and to hold underperforming funds accountable. But ART itself has publicly warned ethical investment options could rank poorly against traditional benchmarks because they avoid investing in dirty yet lucrative industries, which can impact their returns.

Some have also argued that the time frame for the test is too short, as green and ethical goals are much longer term.

“We take investing our members’ retirement savings seriously,” an ART super spokesperson said in a statement. ART has “already made a range of changes to this option’s investment strategy and asset allocation which we believe will improve its performance,” it said.

“In accordance with our merger transition program we are moving towards a harmonised investment menu for all members from next year. As such, we intend to close this option from 1 July 2024.”

“Members will be able to choose other investment options, including Australian Retirement Trust’s Socially Conscious Balanced option.”

The $260bn-plus ART was created in 2022 with the merger of ­industry fund Sunsuper and QSuper in Queensland. Its $440m socially conscious option – a former Sunsuper product – did not fail the test and returned 7.4 per cent over the 10-year horizon, according to its website.

QSuper’s socially responsible fund invests in line with a set of environmental, social and governance principles and excludes companies deriving 5 per cent or more of their revenues from coal, oil and gas, natural gas, alcohol, gambling or adult entertainment.

The website lists Japanese builder Daiwa House, Switzerland’s pharmaceutical giant Novartis, UK’s chemical company Johnson Matthey, and Belgium’s circular materials technology company Umicore as its top holdings.

The ESG-related option was managed by AMP until August 2020 when QSuper decided to pull the product and manage it internally and apply its own ESG yardstick.

ART’s MySuper option, in which most of its 2.3 million members are invested, returned 10 per cent in the past financial year and 8.4 per cent over the 10-year investment horizon.