Cbus has conducted a review of the asset classes in its portfolio to see how the fund can prepare for reaching the target of net zero carbon by 2050.
Superannuation fund Cbus has conducted a review of the asset classes in its portfolio to see how it can prepare for reaching its target of net carbon neutrality by 2050.
Setting interim targets for 2030 has helped the investment team visualise a way towards carbon neutrality by 2050, Nicole Bradford, Global Head of Responsible Investment for Cbus, said in a podcast with [i3] Insights.
“What we did was set an interim target of 45 per cent in absolute reduction by 2030,” Bradford said. “The reason why we did this was for several purposes. Firstly, the absolute target recognises the real world impact and that we need to reduce real world emissions as well as those in our portfolio.
“And [secondly] the targets for 2030 are being seen as being obtainable, because those time horizons, when our investment team are making those decisions, are much more real than 2050.
“Also, the science indicates the 45 per cent reduction by 2030 is what we need to get to for [achieving] 2050,” she said.
Besides, Cbus has set similar interim targets for the companies it invests in, so it makes sense to apply those same targets to its own organisation.
We undertook scenario analysis and we used six different scenarios between a 1.5 and 2 degree range. What we’ve found is that there is a lot of variability in those scenarios, but we can achieve those targets with the current portfolio composition at the current FUM
The fund then looked at each asset class to see how it could achieve the targets and how it could deal with future growth.
“What we’ve done recently is finish a project on our asset class pathways. What does our portfolio look like when we get to 2030 and a 45 per cent reduction?” Bradford said.
“We [set] our baseline and we can accurately map around 72 per cent of our portfolio. The gaps for us are fixed income, which is largely sovereigns, and also cash.”
“We undertook scenario analysis and we used six different scenarios between a 1.5 and 2 degree range. What we’ve found is that there is a lot of variability in those scenarios, but we can achieve those targets with the current portfolio composition at the current FUM.
“One of the challenges for us is working through the growth because the models allow for 3, 4 per cent GDP growth, but we are going to grow at double that rate.
“The other consideration of course is the transition that we are going through in superannuation at the moment with mergers, so we’ve factored those components in as well,” she said.
Fixed Income and Net Zero
Fixed income is a challenge, because what we think of as countries often includes sectors and companies that are already accounted for in other measures. This makes attributing carbon emissions somewhat tricky.
“The challenge in sovereigns is that when you start accounting for a country’s carbon emissions you end up double and triple counting,” Bradford said. “It becomes very challenging and really the question becomes: What are you measuring?
“You don’t really know what the right component is. Is it the operations of the government? Is it the economy as a whole? So you start to bring large accounting errors into your calculations.
The challenge in sovereigns is that when you start accounting for a country’s carbon emissions you end up double and triple counting. It becomes very challenging and really the question becomes: What are you measuring?
“We have decided that at this stage we’ll track our sovereigns and see how they are progressing against 2050 and also 2030 targets.
“In addition to that, we are members of the UN convenied asset owners’ alliance and they are working on this asset class right as we speak. So we will see what comes out of that and if there is anything that we can apply to this issue,” she said.
The project is still a work in progress and Bradford would like to get a more granular view on the various sectors and bring it back to a total portfolio perspective rather than just looking at asset classes in silos.
“[It helps us] see where the risks are through a different lens, but also where the opportunities are.”
To listen to the full podcast interview with Nicole Bradford, please click here.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.