The Australian Treasury Department has opened an industry consultation on a draft bill, until August 16, on how faith-based retirement investment products are tested as part of changes to the Your Performance Test. Future Your Super (YFYS).
He proposes allowing faith-based funds to take an additional performance test if they fail the usual annual performance test, a move that has drawn criticism from responsible investors.
Responsible Investors Association of Australia (RIAA) chief executive Simon O’Connor said performance testing was important, but the current regime penalized products with screens in place, faith-based or not, that deviated from a reference.
The prescriptive nature of the performance test had been recognized, along with the draft legislation, as causing negative results for impact investing and climate-aligned investing due to their measurement against a benchmark.
“At the end of the day, whether they’re denominational or not, we’re quite aware of the negative screening in place, which necessarily means that their alignment with the benchmark won’t be very strong,” he said.
“There are a lot of Australians keen to align investments with their values…vegan, Christian, fossil fuel free funds, so it’s important we don’t have regulation that thwarts that.”
The new government pledged in the election to allow the Australian Prudential Regulation Authority (APRA) to consider a super fund’s religious affiliation when applying the annual performance test and is seeking advice of stakeholders on the draft law in order to adjust the way these products are treated within the framework of the annual performance test.
The legislation seeks to require trustees to apply to APRA for faith-based product status, subject faith-based products to an additional test that takes into account their faith-based investment strategy if they fail the initial test, and exempt faith-based products denominations of the consequences of failure if they pass the additional test.
Access to Australian faith-based super funds has plummeted over the past year, with two faith-based products failing APRA’s performance test.
Catholic Super’s LifetimeOne product and Christian Super’s My Ethical Super have been named among Australia’s 13 worst performers, with both funds merging with secular funds as a result – Catholic Super has partnered with Equip Super while Christian Super has announced in April that it would merge with Australian Ethical Super.
Christian investment funds, such as those set up by Christian Super, which merged with Australian Ethical Super this year, screen out investments in companies not aligned with Christian values, such as those that receive more than a small amount of income from alcohol, cannabis, fossil fuels, gambling, weapons, tobacco and adult entertainment.
These investments also avoid companies involved in the production of abortifacients and contraceptives, stem cell research and the destruction of human embryos.
Meanwhile, Islam-friendly investments align with halal principles, which means interest-bearing companies violate Sharia principles. Haven Wealth Partners’ Ethical Absolute Return Fund, which is Sharia-accredited, excludes companies that cause unnecessary harm to animals, restrict human rights, operate detention centers, discriminate against indigenous peoples, operate in occupied or disputed territories, produce pork products, alcohol, pornography, nuclear energy, fossil fuels, armaments, tobacco, or companies with higher debt-to-equity ratios at 33%.
Haven Wealth Partners managing director Nick Heuzenroeder said his firm had created bespoke, high-conviction, ethically managed super funds for competitive fees, which included a Shariah-compliant fund invested in Australian stocks, real estate and fixed income securities.
While the bill would work in principle, he asked why the slicing of faith-based treatment couldn’t extend to other ethical investment products.
“I strongly believe that these tests are essential because for too long people have been taken advantage of and they have been in a poorly performing fund with high fees,” Mr. Heuzenroeder said.
“But I’m not sure you should cut out (the test) for one domain because they’re right.”
He said encouraging funds to conform to a benchmark produced “37 flavors of vanilla that weren’t to anyone’s benefit.”