When it comes to the energy transition, Aware Super CIO Damian Graham said that while YFYS isn’t a “barrier”, it does complicate the investment process.
“If you look at the index for infrastructure it doesn’t have a leaning towards energy transition assets, and any time you are making investments in that area it’s an off-benchmark position,” Graham told the Responsible Investment Association Australasia (RIAA) conference on Wednesday.
“So I think you doubly have to have a strong, a very strong, conviction that that’s a good investment to make. You’re taking on more risk versus YFYS. But even before YFYS there were other benchmarks where you continually had to think about the active risk. So it’s just another flavour of that in my mind.”
Aware has an emissions reduction target of 40 to 45 per cent across its investment portfolio by 2030 – which can be tricky when YFYS chains it to more pollutive benchmarks like the ASX.
“That’s a tracking error risk, particularly versus YFYS, but we think it’s the right process to go through to support the transition for the listed portfolio,” Graham said.
“And the team have done the work to say that when you look at the carbon emissions across the total portfolio, there’s a heavy skew towards listed markets. So we think it’s a really important part of our plan to support the portfolio and the economy to transition over that long-term… I wouldn’t overplay the constraint, but it’s not irrelevant either.”
Quizzed on the same topic at the RIAA conference on Thursday, Vicki Doyle, CEO of the $93 billion Rest, said that the YFYS test was “important for the time” but that it could make investing harder in the future for reasons beyond the constraints it places on sustainability.
“I think that the indexes might be challenging in a world that is uncertain, and I think we have to give due consideration to that,” Doyle said.
“I had the benefit of hearing from [hedge fund] Wellington this morning on geopolitical issues and they talked a lot about the volatility as companies are exposed to these geopolitical issues and some will boom and some will bust. It also means it could be quite a bit harder to create indexes that take into account these structural changes. We’ll have to think about that.”
Doyle said that the only tool asset owners have to protect themselves against an increasingly “crazy world” is scenario planning – mapping out multiple different outcomes with “military precision”. That’s in keeping with guidance from the regulators that super funds should be working to make themselves more resilient to shocks like cyber-attacks and conflicts in order to protect member money.
“I don’t think you can ignore not only some of the craziness but also some of the structural changes that are emerging underneath this,” Doyle said.
“There’s a lot going on behind the tariffs around quite complex geopolitical thematics, and it is looking like it will change or could change the way and where companies get returns, where the profits are, which countries do well and not well.
“It feels like this particular [geopolitical change] could have a more systemic, structural change. I think we do have to be alive to that. And so when you’re investing and thinking about that it does mean thinking much more deeply about deglobalisation and what that really means.”
New opportunities in transition
While some of the YFYS constraint on sustainability is being eased by the increased number and variety of investments dotting the energy transition landscape now as compared to just a few years ago, Graham said that it can be difficult to find “near-term economic outcomes” in hard to abate sectors.
“But they’re really important activities to undertake, aren’t they?”
“So for me it’s about that combination of, how do we get the right settings, the right support to be able to keep deploying money into the variety of different transition requirements.”
And while the pace of Australia’s energy transition has lagged behind that of some other countries, the recent federal election also means that the “policy settings have become a little clearer domestically”.
“But if you look around the world it’s probably less clear and there’s probably a bit less certainty,” Graham said.
“And I think that does make it increasingly complex from an investment perspective, because certainty is something that’s very valuable, and when policies are uncertain, or geopolitical noise comes into the environment, then it’s even harder to allocate capital. I think that there’s competing forces in that the commitment is pretty clear but the complexity is pretty high.”
Up until about 18 months ago, Aware’s $4 billion portfolio of climate transition-related investments was “dominated” by large scale renewables. But Graham said that it had become “harder” to make the right risk-adjusted returns from them.
“There’s certainly no shortage of opportunities, but marrying it up with solid returns is always the key,” Graham said.
“But we do think there’s really interesting opportunities. One thing we’ve been investing more in is battery storage. We think that’s a really critical part of the transition, obviously, particularly where renewables are a core component.
“And so we do think that the ability to build out that type of combination of battery and renewables is a very attractive one. And we’re looking around the world for that as well, not just in Australia, and that feels like it’s a very large need, not just in Australia but globally.”
