Damian Graham, First State Super CIO

The impact measurement and further emissions analysis work First State Super’s investment team is doing as part of its efforts to meet new climate change targets will result in the $120 billion fund’s broader portfolio taking on more socially responsible investing (SRI) characteristics over time, chief investment officer Damian Graham has acknowledged.

First State Super, which currently offers an SRI option with higher levels of exclusions for a cohort of its members, has continued to build out internal capabilities to measure and factor in climate and ESG considerations across its broader portfolio, Graham has described. First State Super will re-brand itself Aware Super in September, a name the fund announced following its transformative acquisition of VicSuper in July.

The expertise the fund is building in this area, which includes the design of a new benchmarking framework for carbon emissions analysis that sits within its systematic equities team, will continue to be applied over time to investments in the group’s broader portfolio, Graham has explained during an interview with Investment Magazine’s Market Narratives podcast series.

Graham also pointed to a strategy the fund launched towards the end of last year to invest in affordable housing for key workers among its member base – nurses, teachers and carers – as an example of the way socially responsible investing is being incorporated gradually across its broader portfolio.

“My gut feel is the broader portfolios will begin to take on some of the characteristics of the SRI option,” Graham said during the interview which focused predominantly on the fund’s new climate change targets and the potential trade-off between social impact and returns.

“We are targeted to generate the financial outcomes people need. Risk adjusted return we feel can be bettered by understanding different risks.

“There are different risks we are contemplating today than we were 10 years ago as investors – social and environmental – have increased. ESG was dominated by governance risk 10 years ago, I think it’s a much more even blend of all three… I believe [the broader ESG analysis] can improve risk adjusted return and limit the downside,” he said.

In the social housing initiative Graham said the fund had generated more predictable incomes during a time of uncertain rent predictability. Through its social housing investment the fund has made 61 residential apartments in Epping in Sydney’s North-West available for rent to key workers at 80 per cent of the market average rent for the area.

“We have been able to rent them very quickly and have incredibly low vacancy rates in a market where we are seeing rental vacancy increase. So it’s a positive experience for us in affordable housing, we think will deliver strong long term return and we are looking to build more of those…

“We think [social housing] is an attractive part of the property sector given everything that’s happening across retail, office and uncertainty because of COVID and the industrial market where we have significant exposure but feels fully priced given the focus its had from investors,” Graham added.

Climate forward

In early July First State Super announced it would reduce emissions in its listed equities portfolio by at least 30 per cent by 2023 and actively advocate for an economy-wide 45 per cent reduction in greenhouse gas emissions by 2030 as well as looking to replicate this in its portfolio at the same time.

In pushing forward its climate agenda across the broader portfolio and continuing to invest with an SRI lens, Graham noted the change in how the investment teams put portfolios together has been gradual.

“It’s not like we’ve woken up and said we need to think about ESG issues when we do due diligence around an investment,” he said. “We have a blend of the top down and bottom up, so every asset we buy we have a consideration around the ESG and climate is one of those. We think about it in the broader portfolio context as well – we think about the total.”

The carbon emissions analysis is undertaken internally within First State Super’s systematic equities team. The fund uses external providers including Hermes and MSCI as an input into international analysis and the fund will continue to look to buy in expertise, Graham noted.

The fund is currently working on an impact measurement framework for its direct assets which will provide another level to its investment team’s thinking on ESG and in particular climate considerations.

“We are trying to understand what’s the impact of the airport or infrastructure or agricultural asset on things like employment, water, energy usage more broadly. So we are trying to contemplate the broader impact of those assets so we can understand the downstream,” he said.

“We do need to do the fuller analysis regarding the fuller footprint, not just the emissions themselves. For instance in [the case of] gas as a transition asset – clearly gas is an important energy source for Australia, but we want to take a complete view about gas when we think about investing across the energy sector,” he said.

While Graham said the fund’s broader portfolio does take on some of the positive attributes of the SRI option, he added that it had no plans to stop issuing the SRI option to members any time soon.

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