Responsible investors were hit with a reality check last year when annual projections from the Climate Change Authority again reaffirmed that Australia is not on track to meet its 2030 emission reduction target.
As the next federal election looms, the Coalition is already considering backing out of Australia’s 2030 commitment to the Paris Agreement, which is a 43 per cent reduction of emissions from 2005 levels.
While super funds have kept close to their climate targets amid the complicated policy environment, investors have been warned that the emission reduction journey will likely get a lot harder as more progress is made.
“The biggest challenge we see at the moment is the people who set very, very aggressive near-term portfolio intensity targets, because what you found was you could actually get to a portfolio that was maybe 60, 70 or 80 per cent lower-carbon than the benchmark surprisingly easily by tweaking the weights [of companies],” said Ninety One head of sustainable equity Deirdre Cooper at the Frontier Advisors annual conference.
“If utilities are 1000 tons of carbon intensity and software companies are five, you don’t need to do a lot to celebrate a very big win early on.
“Then it’s quite hard to keep delivering that [carbon reduction], and do that and still deliver returns.”
This is coupled with other practical issues such as difficulties in finding good carbon data, Cooper said. Even for scope 1 (direct emission) and scope 2 (indirect emissions from power generation) data, which is believed to have more consistent measurements than scope 3 (indirect emissions from further down the value chain), the range of estimates can still be wide.
These challenges persist as the federal government seeks to legislate mandatory climate-related reporting which eventually will require businesses and asset owners of a reasonable size to provide audited sustainability reports, in addition to other regulatory initiatives such as the sustainable finance taxonomy and product labelling regimes.
REST head of responsible investment and sustainability Leilani Weier said the sheer volume of frameworks for super funds to manage now is “challenging”.
“They’re very good frameworks…but making sense of all that information actually does take time,” she said.
“It is sometimes a little bit feeling like you’re in a washing machine, to make sure that you’re steering the organisation in the right direction and to meet those very, very significant [climate] commitments.”
REST has a goal of achieving a net zero carbon footprint by 2050 and will invest at least $2 billion in renewable energy and low-carbon solutions before 2026, according to its climate roadmap.
The fund also made a slew of impact fund investments since the beginning of this year in agriculture, real estate and listed equities, and said the impact investment allocation will reach 1 per cent of the portfolio by 2026.
Weier said these investments are made with genuine diversification purposes and the fund is “not compromising on financial returns”.
With more investment internalisation, she is confident that REST today is well equipped with capabilities needed to address climate challenges in the future.
“When I first started at REST five years ago…having that [responsible investment] team not in place was quite difficult because you need many messages,” she said.
“Having an investment team that are all on that same philosophical journey [is crucial].”
