The carbon footprint of your super

For the fifth year running, VicSuper has included a section on your half-yearly Benefit Statement that shows an estimate of the carbon emissions generated by your account balance, where you have invested in an option with an exposure to listed equities. This 'carbon footprint' represents an estimate of the carbon dioxide equivalent emissions generated by the listed equity component of your super savings.

In order to estimate the carbon footprint, VicSuper commissioned research to measure the total carbon emissions of VicSuper Fund's listed equities investments. The consolidated VicSuper holdings analysed, with a total value of A$4,188 million, were 9% more carbon efficient than the overall MSCI World ex-Australia Index. The carbon footprint of the fund has increased by 8% from 310 tonnes of CO2e/A$M in 2010/11 to 335 tonnes of CO2e/A$M in 2011/12. During the five-year period of analysis, the carbon footprint has decreased by 6%, from a baseline of 355 tonnes of CO2e/A$M in 2008.

VicSuper year-on-year change in carbon efficiency compared with benchmark

Why have you measured the carbon footprint of my super?

Climate change is recognised as one of the key Environmental, Social and Corporate Governance (ESG) risks and opportunities that pension and superannuation funds must consider in selecting asset managers and determining asset allocation.

In an article titled 'Greenhouse gas levels pass symbolic 400ppm CO2 milestone', the Guardian newspaper reports "Monitoring stations across the Arctic this spring are measuring more than 400 parts per million of the heat-trapping gas in the atmosphere. The number isn't quite a surprise, because it's been rising at an accelerating pace". The International Energy Agency reported that global carbon dioxide emissions from fossil fuels hit a record high of 34.8 billion tonnes in 2011, up 3.2%.

Meanwhile, due to crop failures through the United States and the Russian Federation as a result of drought conditions and/or excessive heat, the United Nations Food and Agriculture organisation reports the Cereal Price Index rallied to 260 points, 14 points below its all-time high of 274 points recorded in April 2008. Although scientists suggest drought periods will increase with human-influenced climate change, there is insufficient evidence to suggest the higher concentration of CO2 in the atmosphere is linked to the drought conditions in different parts of the globe.

In Australia, the Gillard Government introduced a price on carbon. Known as the 'Clean Energy Legislation' package, it aims to effectively reduce the cost of greenhouse gas (GHG) emissions abatement and drive investment in 'clean' energy sources such as solar, gas and wind. As of 1 July 2012, major emitters must pay for the GHGs they emit under a carbon pricing mechanism. The carbon pricing mechanism covers approximately 60 per cent of Australia's carbon emissions and includes emissions from electricity generation, stationary energy, landfills, wastewater, industrial processes and fugitive emissions. The scheme covers direct operational emissions, known as Scope 1 of the Greenhouse Gas Protocol, of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), or specified perfluorocarbons attributable to aluminium production.

Liabilities are based on the emissions during a financial year, measured in tonnes of carbon dioxide equivalent (CO2e). High emitters in Australia now have to purchase a permit for every tonne of CO2e emitted fixed at A$23 per tonne of CO2e in 2012 and rising to $24.15 per tonne in 2013-14 and $25.40 per tonne in 2014-15. Carbon units will be auctioned by the Clean Energy Regulator from 1 July 2015 onwards, when the flexible emissions trading scheme starts. At that time, the Treasury's core policy scenario assumes an initial market price for carbon of around A$29/tonne CO2e.

Why have you focussed on measuring the carbon efficiency of listed equities?

VicSuper Fund invests in four major asset classes: cash, fixed income, property and equities. Equities reflect a claim on companies' assets (in the form of part-ownership) and comprise the largest component of VicSuper Fund assets. The majority of our equities are in publicly listed companies.  These companies variously disclose quantitative and qualitative information related to environmental, social and governance factors.

For the 2011/12 financial year we have again enlisted Trucost to estimate carbon efficiency and quantify carbon risk based on the data disclosed publicly by these companies.

How does climate change affect super savings?

Super savings in VicSuper Fund are invested in one or more of four asset classes to provide an income in retirement, depending on your risk preference. The investments within these asset classes have a range of environmental and social exposures, including climate change impacts.

The impacts of climate change may affect investments in all asset classes and may in turn affect investment returns. However, given the uncertainty around the global policy response to climate change, the unpredictable emergence of new technologies and services which lead to more carbon efficient economies and the physical impacts of climate change, the net effect on returns is difficult to predict. We think it's important to understand and attempt to quantify the climate change related risks in our investments, which is why we decided to commission research specifically on the carbon exposure of VicSuper Fund.

More information on sustainability in investments, and the impact of climate change, can be found in the VicSuper Performance Report 2012.

What does the figure on my half-yearly Benefit Statement mean?

The figure in the box on your half-yearly Benefit Statement is the estimated amount of greenhouse gas emissions, expressed as carbon dioxide equivalent kilograms (or tonnes - depending on the size of your investment), for the listed equity component of your super savings. This figure is derived from the estimated annual emissions of the companies held in VicSuper Fund's listed equity portfolio as at 30 June 2012.

Carbon dioxide equivalent

There are six main greenhouse gases, carbon dioxide being the major one, each with a different potency or 'global warming potential'. For the sake of clarity these greenhouse gases are often expressed in terms of carbon dioxide equivalents (CO2-e)

The six main greenhouse gases are:

• Carbon Dioxide (CO2)
• Methane (CH4)
• Nitrous Oxide (N2O)
• Hydroflurocarbons (HFCs)
• Perflurocarbons (PFCs)
• Sulpur Hexafloride (SF6)

Will the carbon footprint of my investments decrease?

Generally the higher an account balance, the higher an account's carbon footprint. This is due to increased savings contributing to a greater shareholding or ownership of a company. It is for this reason that VicSuper is concentrating on reducing the carbon intensity of your retirement savings along with absolute carbon emissions.

Carbon intensity is a measure of greenhouse gas emissions expressed as tonnes of carbon dioxide equivalents per million dollars of company turnover (or revenue). This is a more valid method than measuring carbon emissions based on a company's market capitalisation (which is the value the share market places on a company), as the value of a company on a share market can fluctuate widely over short periods of time, and is not necessarily reflective of the revenue and carbon-generating operations of the company. 

VicSuper's existing sustainability focus has already contributed to your carbon emissions being lower than if VicSuper did not integrate sustainability considerations into its investment strategy. We aim to continue this focus to further reduce the carbon emission intensity of your investments, along with minimising VicSuper Fund's other investment-related sustainability impacts.

How is VicSuper reducing the carbon emissions of my account?

Due to the wide-ranging impacts of issues such as climate change we believe that integrating environmental, social, governance and economic considerations into investments should not be limited to a single investment option or single asset class, but should be integrated across a super fund's entire investment portfolio.

Alongside this measurement process VicSuper is seeking to reduce the carbon risk exposure and identify and manage carbon opportunities in each asset class. We are achieving this through dedicated sustainability investments and engagement programs in equities and property, and with initiatives in place to continually improve the sustainability performance of the whole Fund.

The investments section of the VicSuper Performance Report 2012 contains further information.

How is the carbon footprint calculated?

VicSuper engaged the UK-based research company Trucost to measure the carbon footprint of VicSuper Fund's listed equities using its world-leading research and analysis.

Trucost make their carbon footprint estimate based on investments held by VicSuper Fund as at 30 June 2012. Therefore, it is an estimate based on a point in time rather than average emissions (and therefore average account balances) calculated over the financial year.

The carbon footprint figure on your half-yearly Benefit Statement is calculated by apportioning Trucost's emissions data across the average of your investments in listed equities over the six months to 30 June 2012.

Trucost's estimates are based on two primary sources of data - company sustainability reports and annual reports. The gaps in publicly-reported company data make it necessary for Trucost to estimate the emissions of some companies. If a company does not disclose its carbon emissions in a comparable form, Trucost uses its proprietary methodology to estimate carbon equivalent emissions using company financial statements as a proxy. Trucost do not provide an error estimate (or error bounds) of their carbon footprint calculation.

More information on Trucost's methodology can be found on the Trucost website.

Further information

If you would like more detailed information on this topic, please read the VicSuper Performance Report 2012.

References

• http://www.guardian.co.uk/environment/2012/jun/01/record-greenhouse-gas-trouble-scientists, 1 June 2012
• http://www.cleanenergyfuture.gov.au/a-major-step-towards-a-clean-energy-future, 1 July 2012
• International carbon accounting standard developed by the World Resources Institute and World Business Council for Sustainable Development
• http://carbonpricemodelling.treasury.gov.au/carbonpricemodelling/content/update/Modelling_update.asp