Even as Australia’s energy transition accelerates, and despite the vast sums of capital required to fund it, superannuation funds find themselves traversing a more nuanced landscape, balancing the expectations of members, performance benchmarks, erratic regulatory and political signals and rising execution risk.
The Investment Magazine Fiduciary Investors Symposium heard that asset owners face the question of how to generate long-term resilient returns from an investment thematic that is increasingly politicised.
A poll of FIS attendees suggested that most super funds in the room believed the energy transition had slowed. A handful believed it had stalled. But Rest Super head of responsible investment Leilani Weier said those findings were a long way from Rest’s experience and that the fund continues to invest strongly.
“Collgar Renewables is one of our well-known investments [and] is looking at around about five new wind farms in Western Australia, where there’s a lot of opportunity,” Weier said.
Surveys of Rest fund members suggest that as many as 86 per cent support the fund’s investments in renewable energy assets.
“Every year, we report on our outcomes, because we have a net-zero-by-2050 objective for the fund, and we’ve had a $2 billion renewable energy target that we are aiming to achieve by 30 June – this year, actually,” Weier said.
“It’s really just renewable energy in our infrastructure asset class and our green bonds. We’re sitting around $2.4 billion now, so we will achieve that target on current valuations.
“We’re also looking at our equities portfolio, where we’ve got over $3 billion in the MSCI low-carbon assets tag. So we’re starting to build up this portfolio, if you add those together, of over $5 billion in assets, and we would expect that to increase over time.”
Weier said she does consider how the fund communicates to members that “this needs to be a steady transition”.
“We can’t actually go faster than the market is letting us,” she said.
TCorp head of listed and unlisted asset management James Murray said investors have seen “a resetting of the return profile” of renewable energy assets in recent years.
“I think there’s some political risk… but in my sense, it’s actually more an environment to be investing in these assets,” he said.
Particularly in the midst of a cost-of-living crisis, part of the political risk is “how do you have assurance that you can go and invest all this money, but effectively that economic rent is not going to be either capped or stolen by the government?”.
“We’ve seen it in electricity distribution assets in Finland with Caruna, where regulation was changed around the regulatory rate of return. We’ve seen tax on super profits, and we’ve seen capping of energy prices now,” Murray said.
“While the return profile has gone up, it’s harder to factor-in that political risk and to get comfortable with some of the risk premium that’s required to invest.”
Fundamentally, however, investment in the energy transition is both essential and inevitable and governments should be encouraging capital into it rather than creating disincentives.
Octopus Australia managing director Sam Reynolds noted that the government’s principal role should be to set sensible market rules to give investors the confidence to plan and invest and then stay out of the way.
Most of Australia’s energy infrastructure is now close to four decades old, and the country “needs about $500 billion spent on its energy system”.
“It needs to be completely rebuilt,” Reynolds said.
“If you’re going to get numbers of that scale, it has to stack up on a returns basis against the other infrastructure opportunities those in this room have around the globe.”
Frontier Advisors head of real assets Lucy Minichello said most super funds she deals with view energy transition assets as core rather than opportunistic investments, but there are questions around whether the asset development pipeline can be effectively executed.
“I don’t always think that the risk associated with that pipeline is actually being accurately priced,” she said.
“It’s actually quite a specialised skill set to get the pipeline done. It’s a quite a different skill set in terms of a financial or perhaps a more investment banking skill set to get the deal done to begin with”.
Minichello said the language around renewable investing is beginning to become more nuanced as a post-Trump political backlash has changed how funds frame ESG investing.
“Rather than focusing perhaps on ESG, they really are talking more in terms of energy security,” Minichello said,
“Most investors are concerned about ESG because it does have a long-term impact on performance. So it’s really more about being under the radar and not being singled out for criticism. But in terms of the investment activity, it’s still continuing.”
Rest believes that despite strong member appetite for investing in renewable energy assets the fund’s trustees must meet their fiduciary duties. The fund’s responsible investment policy requires any asset – renewable energy or otherwise – to measure up on risk and return metrics.
“I don’t think we should ignore bond markets here as well, those debt markets where you can also access the energy transition,” Weier said.
“So, we’ve got the risk and return profiles, we’ve got the member preferences, but we’ve also got societal expectations. The art of mixing those three together, starting with that risk and return, is where you get the great investments, and you need a great investments team to find them.”
TCorp’s Murray said the organisation as also found opportunities in what he described as “second-derivative” companies – for example, merchant marine businesses that service offshore wind farms.
Unlike APRA-regulated entities, TCorp is not subject to the Your Future Your Super performance which Murray described as being “helpful” to its investing. But like its APRA-regulated counterparts, TCorp does have “broader carbon aspirations… over 2030, and 2050”.
“We don’t necessarily feel that we need to achieve [portfolio] resilience within, say, infrastructure or other sectors, we can achieve it at the total portfolio level or through the listed market,” Murray said.
“We keep on looking at the sector. There’s a huge total addressable market that needs to be built. There’s a lot of opportunity to step into this market, but we need to make sure that, first of all, the returns and the price are there, and we can manage it in a way that manages the other portfolio risks.”
