While Australia’s $2.9 trillion superannuation industry won’t be divesting from fossil fuels anytime soon, Cbus Super is making changes to its passive equity investments while several funds including First State Super are said to be reviewing their climate change strategies.
Investment consultants say that with mining and energy companies making up such a large chunk of the Australian stock market and the regulator’s focus on performance, local asset owners are unwilling to sell out of sectors at the expense of returns and risk underperforming their peers. Instead, the country’s largest super funds are weighing decarbonisation targets and investment strategies that transition to a low-carbon economy.
“It’s a very competitive market environment,” said Steven Carew, chief investment officer at JANA Investment Advisers. “If a fund doesn’t hold the big resource companies and they don’t beat the market, it’s going to be very painful. I don’t think funds are willing to take the peer risk.”
This is despite plans by the some of the world’s largest investors to reduce their exposure to fossil fuels and mounting pressure from local shareholder activist groups that made UniSuper the target of a divestment campaign to sell $10 billion worth of shares. (The $80 billion fund is sticking with its strategy to engage with the companies that they own locally and use shareholder resolutions for overseas investments.)
A Responsible Investment Association Australasia survey last year found that just seven funds out of 57 respondents, who together oversee more than $1.7 trillion, applied some form of fossil-fuel exclusion to their portfolio. That’s up from three in 2016 but compares to 33 who exclude tobacco and 21 who avoid armaments.
Cbus chief investment officer Kristian Fok said while the $56 billion fund had no plans to divest, it was looking to incorporate the MSCI Low Carbon Transition score into its quantitative equities strategies that would penalise companies with stranded assets, such as thermal coal, and make them less likely to be included in the portfolio. Fok said while the tweaked quant strategies would replace the fund’s global equities passive allocation, its Australian top 50 indexed allocation remained unchanged, at least for now.
Cbus has set carbon neutral targets for its property portfolio and is looking to set similar goals for its infrastructure assets before applying them across the entire portfolio by 2050, consistent with the Paris Agreement. Unlike many of Fok’s peers, the super funds also doesn’t offer its members a separate product that excludes fossil fuel-related investments.
“We have a fiduciary obligation to look at this fund holistically so we’ve taken the view that (offering a separate fund) is not the appropriate approach,” he said. “It significantly reduces the universe of companies that we get to invest in. It also creates separate issues where you are deliberating deciding to remove access to significant parts of the economy.”
Fok has opted for the fund to stay invested in the companies and use the holdings to influence how a BHP or Glencore transition to a low-carbon intensive world. Even so, the investment chief did concede that his team were able to leverage the divestment by others to pressure companies to change.
“There is a place for both strategies,” he said. “We are not anti-divestment but in the context of climate change it’s not black and white. We may change our minds over time, it’s not fixed, but our current positions is we feel that we have far more capacity to affect change by owning the stock.”
Outside of Australia, fossil fuel divestment has become more common.
Norway’s $1 trillion sovereign wealth fund wants to divest more than $13 billion worth of fossil fuel related investments, including $8 billion in oil and gas firms and around $5 billion in coal assets. California Public Employees’ Retirement System has sold out of thermal coal companies as part of a broader divestment strategy and BlackRock, the world’s largest asset manager, just last month announced its intention to remove some thermal coal companies from their active portfolio as part of a bigger climate change strategy.
With Australian super funds having the highest average allocation to equities compared to their international peers and because materials and energy companies make up more than 20 per cent of the ASX 300 Index and around 9 per cent of the MSCI World, Carew said divesting completely out of fossil fuel was not always feasible.
“Once you move into fossil fuels it means you start to exclude large chunks of the investment universe so it becomes very difficult for funds to go down the path of exclusion,” the investment consultant said. “I think at the moment divestment is (unlikely) but you will see more funds launch products that do exclude fossil fuels.”
First State has recently reviewed its 2016 climate change strategy and is due to publish an updated portfolio transition plan in the coming weeks that will include specific economy-wide and portfolio sector targets that aim to reduce the carbon footprint of the $100 billion fund.
First State’s head of responsible investment, Liza McDonald, said the new plan sets out targets for investing in clean energy and technologies to transition to a low-carbon economy as well as incorporates a “framework for the consideration of divestment” from certain companies or industries.
“We have seen some positive changes through our engagement strategy, as we work with companies to understand how they are planning to transition to a low-carbon economy,” she said in e-mailed comments. “However, where we consider that a company is not able to make this transition, we have always reserved the right to divest from that individual organisation or sector.”
HESTA is also said to be working on a so-called climate change transition plan. The $53 billion super fund already applies thermal coal restrictions across its entire portfolio that includes unlisted companies that derive more than 15 per cent of revenue from activities related to thermal coal. Much like the rest, CIO Sonya Sawtell-Rickson said the fund preferred to engage with companies they are invested with to help drive down emissions. She said the fund’s “active ownership” had led to British oil company BP setting emission-reduction targets and linking them to executive pay.
“We believe that if all we do is simply sell these companies, it is very unlikely to change their behaviour and drive long-term climate action,” she said in e-mailed comments. “Using the leverage ownership provides is more effective than divestment at achieving climate action and the transition to a low-carbon future.”
As for the country’s largest pension fund, they too are sticking with engagement. Andrew Gray, director of ESG and Stewardship at AustralianSuper said the fund’s priority was to see a broad-based business transition to a low-carbon economy.
“Our approach is to engage across our portfolio to influence and support this transition across our investments,” he said. We have a “comprehensive stewardship program on climate change including actively considering all shareholder proposals on which we vote and engaging with companies both individually and as part of Climate Action 100+”
The $180 billion fund has a separate “socially aware” fund option for its members which screens for companies that directly own reserves of coal, oil, gas and uranium. However, more than 90 percent of its members remain with their balanced funds.
Mercer’s global business leader of responsible investment, Helga Birgen, said much more decarbonisation and reallocation by funds was needed across the industry.
The investment consultant said while most of the big Australian asset owners were assessing the carbon intensity of their portfolio, they were less likely to commit to hard-reduction targets or make public announcements about them. She said divestment was just one “important” tool for a fund to deploy, but they were currently more likely to use voting and engagement, as well as to allocate capital to managers focused on sustainability.
“The message is definitely getting stronger and we can see it not just in Australia,” she said. “I would argue that many funds in Australia are doing some work, are deeply engaged but not enough investment decisions are being made. There are a number of portfolios that have carbon targets but it’s not at the scale needed.”