Climate change is one of the greatest priorities facing our global community
As investors, we recognise that climate change has the potential to have a material negative impact on our portfolio due to its impact on the environment and society. And we believe that it’s incumbent on us to manage the financial risk in our portfolio resulting from climate change, on behalf of our members.
What are we doing to manage the financial risk due to climate change?
VicSuper’s approach to managing climate change risk is set out in our Climate Change and Investments Strategy. This strategy clearly defines our climate change beliefs and commitments and addresses risks across three key areas – governance, investment and engagement. This strategy was developed based on an analysis of the implications of climate change for our portfolio and a review of best practice publications including the Principles for Responsible Investment and Investor Group on Climate Change.
Our key objective when it comes to climate change is to ensure that our investment portfolio is resilient and adaptive to climate risk. We conduct stress testing of the portfolio annually against a range of climate change scenarios. VicSuper also commissioned Mercer to conduct a more detailed assessment of the potential investment implications of climate change on its MySuper (Growth) default option. This assessment estimated investment return implications at the asset class and industry sector level under three climate scenarios and considered physical as well as transition risks, modelled between 2017 and 2050.
At a total portfolio level, the analysis found the expected impact on investment returns from climate change to be moderately negative under all scenarios. However long-term returns are less impacted under a 2 degrees Celsius scenario, which we believe indicates that long-term investment returns will be best served by supporting the transition to a low-carbon economy.
But while the scenario analysis identified potential negative impacts to investment returns from climate change, it also identified the potential for some positive impacts to investment returns under a transformation scenario, particularly in emerging markets and for property and infrastructure assets.
Overall, the assessment indicates that our investment portfolio and the direction of our current investment strategy – which has a focus on increasing investments in property and infrastructure with strong environmental credentials – is appropriate in managing the risk of climate change.
How are we encouraging the companies that we invest in to transition toward a low carbon economy?
While working to manage the financial risk due to climate change and reduce the emissions intensity of our investment portfolio, we also seek to contribute to the transition to a low-carbon economy by using our influence as a shareholder to encourage the companies we invest in to take action.
Active ownership involves influencing the activity or behaviour of investee companies. For listed equities, we do this by engaging with the companies we invest in, and voting our eligible shares. Climate change is one of our priority engagement objectives, reflecting its importance to us and our members.
We recognise that most energy companies we invest in generate energy from both fossil fuels and renewables. Using specialist service providers and as part of initiatives such as Climate Action 100+, through engagement, we seek to create change within these companies, including moving toward greater renewable energy generation.
Our engagement focuses on understanding and analysing how companies are strategically responding to climate change and their capacity to transition to a low carbon environment. When current oversight and/or practices are deemed to be insufficient, our engagement prompts further action, including voting for shareholder resolutions. In 2018, we supported all climate change shareholder resolutions lodged in the Australian market. Recent changes, brought about through investor engagement include:
- Glencore, the world’s biggest thermal coal exporter, has committed not to grow its coal production capacity
- Shell has set its first net carbon footprint reduction target and linked remuneration to delivery of the target
- BP supported a shareholder resolution to commit to a business strategy consistent with the goals of the Paris Agreement.
In the future, we plan to continue supporting shareholder resolutions where these align with our priority objectives and support the maintenance or strengthening of company value.
How does climate change impact on our investment decisions?
VicSuper’s fiduciary duty requires us to act in all our members’ best financial interests – building and protecting members’ retirement savings by aiming to deliver steady, long-term investment outcomes. A key part of this is about having an investment strategy that is well equipped to help deliver positive returns in a range of environments - including those impacted by climate change. Climate-related risks are considered as part of our strategic asset allocation process alongside a range of other risks. Importantly, consideration of one risk should not be at the expense of others.
For this reason, VicSuper has not applied a blanket exclusion on fossil fuels. Instead, our preference is to work with our external investment managers to develop more nuanced approaches that retain the characteristics of our portfolio while reducing the financial risk due to climate change. Our investment portfolio is not just made up of company equities, it also includes fixed income, property, infrastructure, alternatives and cash. Even within company equities, a combination of Australian, International and Emerging Market managers with differing strategies ranging from passive index tracking to active quantitative and fundamental strategies are carefully combined to provide a diversified portfolio that provides value for money and is well equipped to help deliver positive returns in a range of environments.
By working with our managers, we’ve been able to tilt our investment portfolio toward lower carbon investments, thereby reducing our portfolio exposure to fossil fuel companies without negatively impacting fees or other portfolio characteristics. Recent relevant investment portfolio changes include:
- Investing $1 billion in an international equity customised carbon strategy that aims to deliver a 70% reduction in carbon intensity and 50% reduction in fossil fuel reserves exposure when compared with its benchmark
- Lowering the emission intensity of our $230 million Australian small caps investments by 25% while retaining other portfolio characteristics
- Invested $70 million in waste-to-energy through Wheelabrator Technologies, $26m in the Ross River Solar Farm and $12m in Finerge wind farms, Centauro renewables and the Powering Australian Renewables Fund through our infrastructure asset class.
We are continually reviewing our portfolio to find new ways of managing the financial risk due to climate change and reducing the emissions intensity of our portfolio.
What if I don’t want my retirement savings invested in fossil fuels?
For members that want to invest their super savings in alignment with their social and environmental values, VicSuper offers a Socially Conscious investment option. Socially Conscious does not invest in company equities or bonds that hold fossil fuel reserves used for energy purposes.