ESG integration outside of equities not always straightforward

Liza McDonald, Head of Responsible Investment at Aware Super

Climate Change is a Social Issue Too

Aware Super on Net Zero

Climate change is not just the ‘E’ in ESG, it is part of a much broader social issue that goes to the core of Aware Super’s member objectives.

Climate change is not just an environmental issue, but comes with a whole raft of social issues, including displacement of communities, food security, water shortages and health-related issues.

Aware Super said its members are well aware of the issues and expect the fund to bear them in mind when investing.

“We hear from our members that it is great to provide them with retirement savings, but ‘we need a world to retire into’,” Liza McDonald, Head of Responsible Investments at Aware Super, said during a webinar hosted by the University of Sydney Business School earlier this month.

“Climate change is an environmental issue, but it is a social issue too. You cannot think of climate change as a risk or an opportunity without thinking of the impact on people and communities and how they will transition,” she said.

It is, therefore, important that the fund’s approach to climate change doesn’t only align with their environmental policies, but aligns with its broader objective of ‘doing good’ for members.

“The actions that we take in terms of investing and how we think about issues such as climate change – that have a real impact and from a risk perspective, also from an opportunity perspective in our portfolio – goes to our purpose in terms of doing well and doing good for our members,” McDonald said.

“So ‘well’ in terms of our returns, but let’s do some good with the capital that we have in terms of environmental and social outcomes,” she said.

Aware Super has committed to become carbon neutral by 2050 and has implemented a range of interim targets for reducing the carbon footprint of the portfolio.

The fund published a report in October last year, called Destination Net Zero, in which it outlines its agenda for achieving carbon neutrality. As part of its interim targets, Aware Super aims to reduce the emissions across its listed equities portfolio by 30 per cent by 2023, compared to a 2019 baseline.

The fund already achieved this target and more when it switched to a carbon constrained benchmark in November 2020. It has since achieved a reduction of 45 per cent.

The challenge is to achieve similar reductions across the whole portfolio, but this is more complicated as data on carbon intensity is hard to obtain for some of its unlisted assets, McDonald said.

image shows a quotation mark

“We have a 45 per cent reduction [target] by 2030 across the whole of the portfolio. We are currently doing some work on base-lining the whole portfolio, which is a substantial piece of work that we need to do. A lot of public companies report their emissions, but a lot of private companies don’t. So it is about getting that baseline to set the targets

“Since 2015, we’ve seen climate change as one of the more material ESG issues that impact our whole portfolio. It is not just one region, or one sector; it is actually a risk across the whole portfolio,” she said.

“We have committed to net zero by 2050 and … we’ve achieved a reduction of 45 per cent across our equities portfolio.

“We have a 45 per cent reduction [target] by 2030 across the whole of the portfolio. We are currently doing some work on base-lining the whole portfolio, which is a substantial piece of work that we need to do.

“A lot of public companies report their emissions, but a lot of private companies don’t. So it is about getting that baseline to set the targets and be able to work with our investee companies, but also our managers,” McDonald said.

In addition, Aware Super has targets for investments in renewable energy and green bonds, some of which are on an annual basis and some longer term.

“We have commitments on how we invest in those opportunities. So in the financial year 2021 we invested over $1 billion in renewables and related carbon technologies, whether that is battery storage in our private equity portfolio or renewables in our infrastructure portfolio. That is an ongoing commitment,” McDonald said.

“We also have a commitment to green bonds and carved out a separate allocation for that. We have already around $450 million in that specific portfolio and that is something our fixed income team continues to work on to grow. We see a real opportunity there,” she said.

__________

[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.