The ESG Interview: Super Aware of Climate Risks

Aware Super’s Liza McDonald highlights the challenges of increasing renewables exposures while managing down portfolio emissions.

Last week, Australia’s second largest superannuation fund announced a major milestone in its efforts to reorientate its investment portfolio away from climate risks to opportunities.

Aware Super said it had committed more than A$1 billion (US$738 million) to renewable energy and low-carbon technology investments. The target was reached two years ahead of the deadline set by its Climate Change Portfolio Transition Plan (CCPTP), published last July.

In parallel, Aware Super claimed a 45% reduction in emissions from its listed equities portfolio since December 2019, outstripping a targeted 30% cut by 2023. The fund also credited its engagement strategy with achieving “significant long-term change” through the net-zero targets declared by several investee companies.

For all this progress, these early steps on the fund’s net zero journey were reported in a matter-of-fact fashion, reflecting the steepness of the road left to climb and uncertainty over the time left to complete the task. Aware Super’s intention is to reduce total portfolio emissions by 45% by 2030, on the way to net zero by 2050.

“Taking decisive action now and responding to the risks of climate change makes good business sense and, as a long-term investor, is critical to ensuring we deliver for our members for decades to come,” said CEO Deanne Stewart, unveiling Aware Super’s 12-month review of the CCPTP.

Time for action

Head of Responsible Investment Liza McDonald attests to the challenges of setting timeframes for tackling climate change. “We always say climate change is a long-term risk, but actually it’s a risk in the portfolio now,” she says.

“We think we’ve got until 2030 or 2040 or 2050, but do we? We have to make decisions now. Particularly in Australia, we are seeing the impacts on the environment, on communities and our members.”

Created through the merger of three public-sector focused superannuation funds – First State Super, VicSuper and WA Super – in July 2020, Aware Super launched its CCPTP decarbonisation programme in parallel with this new identity. Established in 1992, First State Super originally provided superannuation benefits to New South Wales government employees, expanding to non-government workers in 2006 and merging with Health Super, which served health and community service workers, in 2012.

As First Super, the fund issued a Climate Change Adaption Plan in 2015, and developed its CCPTP from late 2019. The CCPTP commits Aware Super to short-, medium- and long-term targets in three areas: low-carbon investment, portfolio future proofing, and engagement. The first primarily requires progressively reducing listed equity emissions, setting reduction targets for unlisted investments and investing in businesses that address climate change via low-carbon technologies.

Future proofing means divesting from thermal coal, implementing a physical risk assessment into Aware Super’s due diligence processes and continually appraising climate change impacts across the portfolio. Engagement involves dialogue with companies and fund managers aimed at improving their reporting and risk management related to climate change and their low-carbon transition.

This includes collaboration with national and international investor groups, such as Climate Action 100+ (CA100+) and the Investor Group on Climate Change (IGCC), including its Physical Risk and Resilience Working Group. It also encompasses dialogue with regulatory bodies and policy advocacy with policy makers.

Opportunities for positive impact

Aware Super’s A$150 billion AUM is invested across multiple asset classes and geographies, but its initial efforts to identify climate-positive investments have focused on private markets, with the fund’s infrastructure and private equity teams tasked with finding opportunities through existing and new managers. McDonald insists there is also scope for positive climate impact in Aware Super’s listed equities portfolio, but says it makes most sense to allocate additional capital to unlisted investments in the first instance.

“When we thought about the different sectors, we saw technology and innovation – which was already a focus for the private equity portfolio – as having a clear alignment,” she adds.

Aware Super’s experience in renewable infrastructure investment stretches back almost a decade to 2012, when – as First State Super – it struck a deal with an Asia-focused infrastructure manager to invest in a wind and solar project. More recently, McDonald admits it has been hard work to find investments that meet the fund’s financial, environmental and social hurdles, especially domestically.

“It has taken us some time to find those opportunities,” she notes, due partly to high and growing demand for sustainable infrastructure assets in Australia. Recently, the Australian Financial Review reported that asset owners and managers were increasingly having to look elsewhere, some calling for clearer policy direction on climate change adjustment and mitigation from the federal government to further stimulate investment.

Aware Super’s recent activity includes an investment in Generate Capital, a Californian operator of sustainable infrastructure, including solar, energy storage and waste management systems, and a 10% stake in Terra-Gen, a US-based renewable energy platform with 1,600 megawatts (MW) of assets across wind, geothermal, solar, and battery storage technologies and more than 3,000 MW of projects under development. According to Aware Super’s 12-month review document, Terra-Gen is “poised to capitalise” on California’s growing demand for flexible dispatch resources via its operating and advanced stage development battery storage projects.

The fund has also invested in BNP Paribas’ A$140 million equity-linked green bonds, tied to Australia’s first forward-looking climate index, the Australian Climate Transition Index. Its domestic renewables investments include Snowtown 2.0, a South Australian wind farm in 2019, in partnership with a private equity manager. Others are in the pipeline, says McDonald.

“There has certainly been more opportunity on the international side, but we have continued to find those domestic ones,” she says, pointing out that publicly listed Australian firms are increasingly committing to transition plans and migrating to net-zero business models, thus broadening the range of available sustainable investment opportunities in Aware’s home market.

Even larger-than-life Australian businessmen like Andrew ‘Twiggy’ Forrest – billionaire founder and chair of Fortescue Metals Group, one of the world’s largest iron ore producers – are placing large-scale bets on sustainable investments, such as green hydrogen.

McDonald also credits Australia’s state governments with taking the initiative. “Both New South Wales and Victoria have commitments around emissions reduction and renewable energy, so we are starting to see a lot more opportunities here in Australia that we can support through investment and deliver returns to our investors,” she says.

Fully engaged

On the emissions reduction side of the equation, a key step for Aware Super was the implementation of a divestment policy for thermal coal mining, completed October 2020. But engagement plays a large and growing role in decarbonising its listed equities portfolio.

Climate-related priorities are fully integrated into Aware Super’s engagement strategy, which prioritises engagement with the top 20 emitters (measured by Scope 1 and 2) in the fund’s Australian listed equities portfolio. During its 2021 financial year, Aware Super held more than 60 climate-focused discussions with 14 firms, chosen for the materiality of their climate-related risks to its portfolio.

In these discussions, Aware Super sought to deepen its understanding of firms’ transition pathways and encourage the setting of short-, medium- and long-term targets. Its representatives also raised ways of improving investee firms’ climate-related governance – such as incorporating climate-related KPIs into senior executive remuneration – and reporting, via use of guidelines set by the Task Force on Climate-related Financial Disclosures (TCFD).

As an active member of CA100+, Aware Super is the engagement lead for a number of large Australian firms. “I think it has been one of the more successful collaborative engagements. It has been very clear on its asks and transparent on progress achieved on company commitments,” she says.

While Aware Super conducts much of this engagement directly with domestic firms, it works with an external engagement provider to support access and dialogue with firms internationally.

The conversations are neither confrontational nor cosy, but they are increasingly detailed, focused on concrete commitments and granular transparency. “Engagement is one of the most important elements of the CCPTP. As owners, we are able to influence and engage with companies in terms of emissions reduction and transition,” says McDonald.

Capex is rising up the agenda, as Aware Super and its peers try to get a better handle on firms’ progress in transforming their business models. Aware Super is also increasingly asking investee firms to provide further information on the social impacts of their transition plans, with the aim of influencing “the positive aspects that they can accomplish in terms of their transition”.

These enquiries are at an early phase, says McDonald, identifying the metrics needed to understand and track impact and progress effectively, both at the company and portfolio level. This concern for the interests of workers, communities, consumers and supply chains is reflected in a recent IGCC report, supported by Aware Super along with other major superannuation funds, which makes a series of recommendations for “prudent investor practice in a just transition”.

Heading in the right direction

While investors increasingly want to see evidence of commitment through action on an appropriate timescale, McDonald recognises that important shifts cannot happen overnight, such as incorporating climate-related targets into remuneration policy. Nevertheless, timelines and milestones must be set for investors to monitor progress toward agreed targets. If commitment or progress is not forthcoming, escalation needs to kick in to explore further options.

“If your engagement is not successful and you think there is the risk that a company will not be able to deliver, continue to operate and provide returns to your members, there is escalation,” says McDonald. This can involve signalling your position through votes on shareholder proposals, or voting against reports and directors or, “where you’ve exhausted everything”, divestment.

McDonald agrees that target-setting is perhaps an easy but necessary first step toward decarbonisation of portfolios and business models that helps to ensure all parties are heading in the right direction, providing transparency on the ‘how’ as well as the ‘when’ and the ‘what’ of net-zero strategies.

“For those hard-to-abate sectors, like steel, we need to see companies looking for solutions and partners. It will also be a real collaborative effort between companies and investors. We will give them the time if they provide a transition pathway.”

But investors will give firms short shrift, she suggests, if they see no substance in a net zero plan. “We want to see that roadmap and want to see the short- and medium-term targets for that company,” says McDonald, pointing out that the information is necessary for the transition to be a truly collaborative effort. “We certainly have acknowledged that we need to do a lot of work in the portfolio over the shorter term to ensure that we can make those longer-term targets.”

Race against time

Climate-related business transition asks a lot from all parties. As Aware Super’s portfolio of renewable and low-carbon investments continues to grow, McDonald and colleagues are also focused on addressing one of the perennial challenges of the private equity investor. “We can obviously get lots of data on our listed portfolio, but there’s a lot of work to be done on our unlisted portfolio,” she says. “We need that data to be able to set a clear strategy and emissions reduction target across the portfolio. It might be a big challenge, but it’s what we’re focused on over the next six months.”

To assess firms’ transition plans, Aware Super has invested in the necessary skill sets and information resources. McDonald says the fund is “fortunate” to have a senior member of the investment team with first-hand experience working with the energy industry on the impacts of climate change. Aware Super has leveraged this expertise, both to upskill the investment team, and as part of the education of the senior leadership team, executives and board.

An ESG-focused manager selection process established in 2014 has evolved since to reflect an increased focus in certain thematic priorities, including climate change and modern slavery. Beyond these specific issues, McDonald placed emphasis on being able to monitor managers’ processes and priorities over time, including how they engage with investee companies. “I think the monitoring aspect is a critical part, being able to monitor how managers are enhancing their processes, how they’re enhancing their resources and how they upskill on these issues as well,” she says.

As well asking a lot of themselves, their suppliers and their investee companies, McDonald suggests asset owners are looking for more from the public sector, too. “Regulation is key for us. Advocacy is another important piece,” she says, adding investors and companies are increasingly providing input in the hope of steering policy direction from federal government on Australia’s overall commitment to net zero.

Australia is one of the few developed countries not to have set a timeline for reaching net zero emissions, to date preferring to commit to a reduction of 26-28% from 2004 levels by 2030.

In the absence of clear direction from the federal government, the Australian Sustainable Finance Initiative has effectively filled that role, with banks, insurers, asset owners and other parts of the finance industry first coming together to set a roadmap and then working with the government to set policy. Finance sector supervisory bodies have also provided expectations and support, with the regulators for the superannuation sector stating that climate risk is part of trustees’ obligations and offering guidance on climate change risk management.

McDonald welcomes the rising swell of activity, but says it can’t come soon enough. Like many Australians, she remembers the bushfires of the summer of 2019-20 all too well to be complacent.

“The biggest challenge we have is time. We don’t actually know how much time we have to transition this portfolio. Are we going to see a lot more severe weather events? Pre-Covid, we had the bushfires and our members were on the front line,” she observes.


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