Climate change can have a broad ranging impact on economies, financial markets and our members’ investments over the long term
Investments in property and infrastructure, like toll roads, airports and ports, may be affected and there could be an impact on the operations of many companies in which AustralianSuper invests.
Climate change has the potential to effect the longevity of assets,companies and their valuations in a variety of ways.
Rather than simply excluding particular investments on the basis of these factors, we weigh the risks and returns for that investment and determine the appropriate investment exposure.
Climate change creates two underlying considerations for investors:
- A constraint of future fossil fuel consumption
- The physical change in climate.
1. Constraint on future fossil fuel consumption
A constraint on future fossil fuel consumption could occur due to public policy actions and/or technology developments.
The specific investment questions arising from this issue are:
- Stranded asset risk: what is the risk of fossil assets suffering a reduction in value?
- Carbon pricing risk: what are the implications of a price on carbon?
- Carbon constraint investment theme: which companies/assets are likely winners or losers as the economy transforms towards lower fossil fuel consumption
2. Physical change in climate
The specific investment questions arising from this issue are:
- Physical impact risk: which assets are likely to incur physical impacts?
- Climate change adaptation investment theme: which companies/assets are likely winners or losers as society adapts to the physical impacts of climate change?
We address these considerations as part of our Active Owner Program.
ESG - choosing our investments
The way we manage ESG factors in our decision making is focused on improving outcomes through the assessment, integration and valuation of ESG factors in the investment process.
As part of our internal equities investment process, we consider the key value drivers for companies. Some sectors are more susceptible to valuation impacts due to a constraint on future fossil fuel consumption while other sectors are more susceptible to valuation impacts due to physical changes in the climate.
We identify these sectors and score companies in these sectors on the management of these issues. These scores feed into the active investment process that determines which companies we invest in.
AustralianSuper also monitors the integration of climate change considerations by the external fund managers who invest on our behalf. We review equity managers on an ongoing basis regarding their management of various ESG factors, including, specifically, stranded asset risk.
To further consider how our investments may be impacted by a constraint on future fossil fuel consumption, we look at our whole-of- portfolio carbon risk relative to appropriate benchmarks by calculating the carbon footprint of our equity portfolio.
Obtaining this data is important from a trend-monitoring perspective. Given the long-term global move towards decarbonisation, it’s critical to monitor our carbon intensity over time to ensure our portfolio is in a position to operate in a decarbonised world over the long-term.
Every two years, AustralianSuper commissions environmental data experts Trucost to analyse the exposure to carbon in our Australian and international equity portfolios.
The most recent analysis was completed in December 2015. Following are the key findings:
- AustralianSuper’s domestic equity portfolio is 10.63% less carbon intensive than the ASX300;
- that our international equity portfolio is 3.19% less carbon intensive than MSCI ACWI ex AU; and
- that our domestic equity portfolio has progressively become less carbon intensive relative to the benchmark over the past three analysis;
Property & infrastructure
AustralianSuper directly buys property and infrastructure, like toll roads, ports and airports around the world. During the bidding phase, we consider all aspects of the asset to determine its value. An ESG assessment of the asset is integrated into the bidding phase as good environmental management reduces risk and enhances value.
With a constraint on fossil fuel consumption, property and infrastructure investments are most likely to be impacted by carbon pricing risk.
That’s why we consider the energy efficiency of an investment before buy it. We also consider how the investment will be managed to make it more energy efficient over time.
Given the physical nature of these investments they may also be affected by physical changes in the climate.
How an asset may be impacted by climate change given its geographic location is part of our assessment of its value.
We also assess how these risks are part of the asset management plan and what role a regulator may play in insuring asset owners against physical damage. For example if the regulator will provide compensation in the event an asset or part of an asset becomes stranded as a result of constraints on fossil fuel consumption.
For our major Australian infrastructure investments, we’ve undertaken a climate change adaptability risk assessment.
This helps us understand the potential physical impact of climate change on these investments and to build strategies to manage these physical impacts in long-term asset management plans.
For example, if an airport was subject to rising sea levels or flood risk, a climate adaptability assessment would indicate how high a runway should be constructed to minimise this impact.
In the long-term management plan of the runway, management could build into this plan a strategy to increase the height of the runway over time.
Stewardship – using our influence
As an active investor we exercise the rights and responsibilities of being a large shareholder – including voting and engaging with companies. We aim to effectively communicate our long-term investment interests to companies we invest in so that we can improve returns for our members.
As an investor, we need to know how corporations are tackling important ESG issues like carbon and other greenhouse gas emissions. In countries where there are existing emissions trading schemes or carbon taxes, or these are being introduced, this can have a short-term impact on a company, but it can also have implications for the longer term cost structure of a business.
So information about what companies are doing to assess their carbon emissions and potentially reduce them is becoming more important.
AustralianSuper has frequent meetings with large Australian companies we invest in to discuss these issues and how they are managing these risks.
This helps us form an accurate investment view about the company.
AustralianSuper also often encourages companies to provide greater disclosure on their assumptions and management regarding climate change.
Climate change specific resolutions are put forward from time to time at company Annual General Meetings. When a company that falls within our voting coverage universe. AustralianSuper actively considers the merits of each of these resolutions and votes accordingly.
Whilst we integrate ESG factors across the range of our investments we recognise that it’s important to give members choice and we do that by offering members a range of investment options including the Socially Aware option.
About Socially Aware
Our Socially Aware investment option is a balanced investment option that doesn't invest in shares of Australian or international companies that:
- directly own reserves of coal, oil, gas or uranium*
- produce tobacco, cluster munitions and land mines
- have single gender boards i.e. exclusively male or female boards (ASX200 companies only)
- have been flagged as having human rights, labour, environmental or governance controversies.
*Reserves, in this context, are coal, oil, gas or uranium that can be extracted from known fields at an economical cost. The option can still invest in companies that invest in, provide services to, or buy, process or sell products from the excluded companies.
Our Socially Aware investment option removes investment in companies that own fossil fuel or uranium reserves regardless of the size of their ownership. We believe this is the simplest, most transparent way of removing these investments at their source while enabling the option to meet its investment return objectives.
It can still invest in companies that invest in, provide services to, or buy, process or sell products from the excluded companies. These might include companies that have shareholdings in or banks who lend money to a company, service-providers like security, catering or office suppliers or petrol refiners and distributors.
The primary supporting activities undertaken to manage climate change are collaborative initiatives and reporting.
AustralianSuper is a member of the Investor Group on Climate Change (IGCC). This group focuses on the impact that climate change has from an investment perspective and advocates for constructive climate change policy.
AustralianSuper is also a member of the Carbon Disclosure Project (CDP).
AustralianSuper participates annually in the Asset Owners Disclosure Project. This global survey considers how well asset owners manage the issue of climate change across their portfolios and Fund’s disclosure regarding climate change management. AustralianSuper was ranked 7th of 500 funds in the 2016 survey.