VicSuper has committed $100 million to invest sustainably in private equity after already hitting its $3 billion sustainable investment target for 2020.
Kim Farrant, the $25 billion super fund’s portfolio manager for responsible investments, said allocating capital to private equity was the next step.
VicSuper already has $1.5 billion invested in low-carbon equities, $722 million in green property and $344 million in socially conscious equities and fixed interest assets that screen for fossil fuels.
Farrant said while public market investments such as low-carbon equities are scalable and signal that real-world outcomes matter, there are opportunities for investors to contribute to a more sustainable future through the private market by becoming an anchor investor.
However, she said integrating ESG considerations into private equity was challenging as businesses were typically less mature, require additional support and there is often little data available.
“And for impact investment, a significant part of selecting the right investments is not just identifying businesses that have the potential to create positive outcomes but those that are receptive to working with you to amplify that impact,” she said.
Simon O’Connor, chief executive of the Responsible Investment Association Australasia, echoed these sentiments, saying responsible investors can carve out additional value in private equity by using ESG as a way to strengthen the management and reduce the risks in the company they are investing in.
He said that the nature of private equity required a higher level of ESG due diligence than listed equities.
“The lower liquidity, the often higher investment size, and the proportionally higher equity stake requires understanding in detail the full set of ESG risks in any private equity investment,” O’Connor said. He added that there was no off-the-shelf ESG information that could fill all the information gaps required.
Better bond metrics
Farrant said until very recently that an information gap had also been the case for sovereign bonds and as a consequence, exclusionary screening for socially conscious investments had only really applied to equities.
“While part of the approach used for equities can also be applied to fixed interest, different data and approaches are needed for treasury and government-related bonds,” she said.
Last year, VicSuper partnered with BlackRock’s local arm to develop an ESG Global Bond Index Fund which now allows the fund to apply its exclusionary screens to fixed income for its socially conscious investment option.
While some super funds exclude corporate bonds that don’t meet ESG criteria, this allows VicSuper to exclude treasury and government-related issuers with an MSCI ESG Government Rating below BB.
O’Connor said there was a diverse array of approaches to how responsible lending is applied to bonds. “Some investors will choose to exclude certain corporate debt or sovereign debt whilst some will take an engagement approach, or weighting or tilting their exposures based on ESG risk,” he stated.
“Divesting a tobacco stock is easy; working out how to evaluate, assess and act on the risk in a US treasury bond is very complex as there are strong positives and negatives all wrapped up in it.”
That view jibes with Farrant. She said sovereigns have different ESG ratings than corporates so one sovereign score is relative to other sovereign scores. “Whenever applying an exclusion, it’s important to weigh up the risk of moving away from a standard index,” she added.
The portfolio manager said the key was to apply an approach that suits each particular investment option – that exclusions may suit an SRI option, but ESG integration and engagement are more appropriate for standard mixed asset class options.
This year marks VicSuper’s second year of focusing on the United Nation’s sustainable development goals, or SDG, of which it actively contributes to eight.
Beyond simply describing its responsible investment process or mapping capital allocations, VicSuper has also begun to quantify real-world outcomes from its investment strategies.
The superannuation fund now tracks SDG-alignment as a metric for equities performance monitoring.
“Working with our investment managers and asset operators, we measured, on an equity share basis the greenhouse gas emissions savings that our renewable energy and low-carbon equities investments create,” said Farrant.
She said quantifying the dollar contribution to each SDG across the equity portfolio and renewable assets was important for members.
“We know that they will measure our success both by the returns we generate and the real-world outcomes that we create, which is why it is so important that we measure outcomes,” she said.