The $15 billion NGS Super is prepared to sell off shares in companies which it believes are merely “greenwashing”, as part of its strategy to achieve a target of having a carbon neutral portfolio by 2030, according to chief investment officer Ben Squires.
“We’ve done the work to identify which companies are greenwashing,” Squires told Investment Magazine.
“I won’t name the companies, but we have done the work to allow us to create an exclusion list of companies which we believe are misleading in the targets they have set, and which they will not be able to achieve.”
“It has given us confidence to create a Scope 3 exclusion list which will be rolling out across our portfolio within the next 12 months.”
The proposed sell off program means that the fund says it will have no “stranded assets” in its portfolio by 2025.
The fund now has one of the most aggressive targets in Australia to reduce carbon emissions in its investment portfolio of any super funds, having just announced a target date of 2030 to have a carbon neutral portfolio- two decades earlier than many other funds in Australia.
It has also committed to an interim target of a 35 per cent reduction in scope 1 and 2 emissions in its portfolio by 2025.
Hitting both goals and targets
In an interview with Investment Magazine, Squires admitted that moving to the stricter new target was “not easy” for the fund, particularly given the performance tests in the Federal Government’s Your Future, Your Super regime.
But he said he felt NGS could achieve its goal of having a carbon neutral investment portfolio by 2030 and still meet performance targets.
“This is a really hard thing to do,” he said. “If it was easy everyone would be doing it. But you need trailblazers.
“You need people who are willing to try to understand how you can achieve this goal without compromising returns.”
He said the Your Future, Your Super regime made it harder to move towards net carbon neutral in such a tight time frame.
“You might be able to take a 20-year approach in a pre-Your Future, Your Super world but now you have an eight year horizon for your investment target – maybe even shorter.”
More aggressive target needed
Squires said that the fund believed it needed to have a more aggressive target than a net carbon zero portfolio by 2050.
He said it was “very easy” for funds to announce a 2050 target for being carbon neutral.
“You don’t need to do anything,” he said. “It is a very market based acceptable target approach for a super fund. It effectively means that our funds don’t need to do anything. The market will naturally have that level of carbon attrition.”
But he said NGS believed that a much more aggressive approach was needed to decarbonising its investment portfolio given the potential economic loss of investing in companies which were not moving to significantly reduce their carbon emissions.
“We felt the science was very clear,” Squires said. “There was a gap between what the science tells us where we need to get to and how markets are pricing in future risk.”
“We believe that at some point, probably well before 2050, these externalities are going to start to get priced in in a material way.”
Engage with companies to reduce carbon emissions
Squires said NGS believes there was “significant risk on the horizon” for companies which were greenwashing and had no real commitment to reducing their carbon emissions.
He said NGS believed that having engagement with companies about their plans to reduce their carbon emissions was important.
But he said that just voting shares at the annual meeting of a company which was not moving fast enough to reduce its carbon emissions was “not really engagement.”
He said there were plenty of other better investments which could be made in companies which were actively trying to decarbonise their portfolios.
“If we are just a minority shareholder in an energy company and we vote – it my mind that’s not really engagement,” Squires said.
“We’re better off making sure our capital is invested in positive change.
“That’s what we are focused on – supporting those companies and divesting companies which are clearly going to be stranded in the future and their disclosures on their carbon objectives are somewhat misleading.”
He said while NGS would be selling out of some listed Australian companies, it was also seeing new opportunities for investment in the private equity sector which were in line with its net zero carbon investment goals.
Still new opportunities for investment in renewables
“There are some fantastic opportunities within the private equity space in Australia,” he said.
“There are some really good ideas coming through which will fast track decarbonisation strategies for a number of different industries,” he said. “We’re investing on that side as well.”
NGS Super fund has its roots in the non government schools and community sector.
Squires, who has been working in the investment area of NGS for the past 14 years, said there were some members who were not happy with the fund’s approach.
“We have a minority group of members who are perhaps a little bit more conservative and would prefer a slower approach,” he said. “But we also have a significant group of members who are quite educated on the impacts of climate change and are very supportive of what we are doing. The general feedback we are getting from the members is that they are supportive of what we are doing.”
He said NGS was also finding new opportunities for investment in renewable energy and in other technology areas.
“They might be high initially in Scope 1 and 2 -such as mining companies – but there is the capacity for those companies to transition to a low carbon world.
“We are comfortable in giving companies time if they are actively investing in solutions to reduce their business from a carbon perspective.”
Squires said NGS was also looking at investing in proxies for the energy industry to help keep up its returns.
NGS not compromising on returns
“We’re not going to compromise on returns,” he said. “We are looking at proxies we can use. As we reduce our exposure to particular segments of the economy, such as the energy industry, what other instruments can be used which provide degrees of correlation?”
He said this could include investing in a basket of commodities which also went up when energy prices rose.
“There tends to be a high correlation between different forms of commodities. It could be soft commodities. It could be gold and silver. We did make quite a large allocation to gold in our portfolio which worked quite well in a risk off environment.”
He said it was also possible to use derivatives and hedge fund based strategies to boost returns and provide an alternative to some energy investments.
Mr Squires said he believed the strong showing of the Greens and other parties with a platform on climate change in the recent Federal election was a result of voters seeing the impact of climate change in their local areas.
“What the science has been telling us is that things are going to get a lot worse,” he said. “People see the floods and the fires as being symptomatic of it. They are looking around and saying ‘is this the world we want to live in? Is it really worth it?’
“The election has shown that there is a significant growth in awareness of these issues. But many of the future costs of this are not yet priced in by consumers and the market.”
Squires said NGS’ policies on decarbonising its investment portfolio were as a result of many years of taking an active view on climate change and ESG issues.
“It’s been a long time coming. It is not new,” he said.
“We started off, like many funds do, with this engagement mindset. Supporting the UN Principles of Responsible Investment and working with industry bodies like the Australian Council of Superannuation Investors (ASCI).
“But now we have invested significantly in internal resources. We’ve got phenomenal people in our business including a number of PhDs and engineers who are giving us deep domain expertise and who can really dig deep in this complicated area and help solve some of the big questions we have around decarbonisation.”
For more on ESG investment, you might like to consider our Fiduciary Investors Symposium – more information here.
