The impact of climate change on superannuation funds both from a portfolio returns as well as a governance and stakeholder management perspective is not lost on UniSuper CIO John Pearce.
“It dominates everything, from the questions members ask to interactions with internal and external stakeholders,” Pearce acknowledges in a recent interview with Investment Magazine.
“It’s the single biggest development I have witnessed and it’s happened very quickly,” Pearce says.
UniSuper was singled out in an activist campaign at the start of last year instigated by Market Forces for holding companies with fossil fuel exposure; the $90 billion fund has since committed to net-zero carbon emissions targets along with a number of other funds towards the end of last year and divested some of its thermal coal holdings.
“Just a few years ago there were obviously special interest groups but its become a lot more main stream and that’s happened in a short time,” Pearce says. He notes that 80 per cent of the discussions relating to environmental, social and governance concerns address the ‘E’ with climate change currently taking centre stage.
Pearce uses decarbonisation as the prism through which he views the risks and opportunities climate change presents to the portfolio.
“We accept the science is there, decarbonisation is an all-pervasive trend that’s going to happen in the next decade or two… You have to avoid assets potentially stranded and hit with penalties so you make sure your portfolio avoids those companies,” he says.
UniSuper no longer invests in companies with greater than 10 per cent exposure to thermal coal and has set targets for all of its portfolio companies to have Paris Agreement-aligned operational commitments by the end of this year. Overall Pearce says Unisuper’s portfolio – 70 per cent of which is internally managed – will aim to have net zero emissions by 2030.
But it’s the opportunities created by the climate change trend that Pearce is perhaps more keenly focused on than the exclusions, particularly as capital starts to ebb and flow on the back of broader market movements.
Choosing an entry point
First and even second order beneficiaries of the climate thematic are already highly valued given the sheer amount of money flooding into financial markets chasing these opportunities, Pearce points out.
“There are many ways of capturing the thematic but it depends how much you pay for these. The most expensive way to capture is go in and bid for a windfarm and we are avoiding that,” Pearce comments.
Tesla, Samsung Electronics, SolarEdge Technologies are examples of portfolio holdings UniSuper lists in its top 20 that directly benefit from the climate thematic.
In terms of second order beneficiaries he points to utilities managing the transition from fossil fuels to renewables along with commodities companies with exposure to lithium and copper as opportunities he’s keeping an eye on.
“There are ways we are capturing the climate and decarbonising theme but they’re also expensive,” he says, pointing to earnings multiples of more than 500 times for the higher profile opportunities and 60-70 times earnings multiples for others.
Capturing the cycle at the right time will be Pearce’s best chance of ensuring his approach to climate change is in synch best financial interests of UniSuper’s members.
“You’ve got to believe the cycle hasn’t died yet and what is expensive today there will be opportunities to invest in future.
“Once the Fed gets on a tightening cycle there will be some opportunities in the market. With jitters in the market there will be some real opportunities, good companies get sold with bad companies and that’s when we look to pile in,” he says.
Owning engagement
When quizzed on UniSuper’s allocation to the resources sector overall, which includes BHP Group, APA Group and Rio Tinto among its top 20 local equity holdings, Pearce notes he does not subscribe to a long-term strategic asset allocation, meaning the funds allocation to resources is not set in advance and will go up or down depending on the opportunities.
Further, because the majority of UniSuper’s assets are managed internally Pearce highlights the fund is perhaps better positioned than most to force change through engagement, a path pursued recently with Woodside Petroleum which has lead to improved sustainability disclosures at the company and a shareholder resolution calling on the company to adopt Paris-aligned targets.
“We are heavily engaged with companies,” Pearce notes, singing out BHP which he says invests in converting energy sources into renewable energy even though thermal coal still accounts for around 10 per cent of the miner’s overall revenue.
Addressing climate is as much of an operational and branding issue for funds these days as it is a portfolio matter, Peace acknowledges, particularly in light of the fact UniSuper will convert its fund to public offer status for the first time in July this year.
“Absolutely its an issue with influence that extends beyond the purview of the investment team and into the boardroom,” he says.
But it will be the investment returns where Pearce focuses his energy addressing the all pervasive climate thematic.
“I am fortunate I have built up a lot of capital with the board over time and they are supportive of my approach,” he adds.
UniSuper announced on Wednesday former Aware Super group executive and former Colonial First State head of wholesale distribution Peter Chun will replace Kevin O’Sullivan as CEO of UniSuper from September 6.
O’Sullivan discussed his legacy including his working relationship with Pearce, the fund’s new public offer status and the stapling environment in this recent interview with Investment Magazine.
Interesting article. Given the potential agency risk with chasing the next big thing and in particular around measuring and creating credits to record yourself as “zero emissions” this should keep trustee boards on their toes