Australia’s Fires Push Pension Plans Into Action
Institutional investors Down Under begin to rally behind more ambitious environmental efforts.
Australians are no strangers to bushfires. But the summer inferno, which destroyed local communities, incinerated bushland, and killed a huge number of wildlife, has been a wake-up call of sorts.
What happened in Australia has provoked a major effort by institutional investors in the world’s 14th largest economy to do something about the problem—and to push for meeting the objectives of the 2016 Paris Agreement on the environment.
In the US, many pension plans and asset managers are mounting similar campaigns. BlackRock CEO Larry Fink recently wrote, in his annual letter to CEOs, “Climate change has become a defining factor in companies’ long-term prospects.” He added, “In the near future—and sooner than most anticipate—there will be a significant reallocation of capital” to meet sustainability goals. But in far-smaller Australia, the institutions’ actions are potentially more influential.
“Despite the obvious tragic impact to individuals and wildlife, I personally also view the bushfires as an opportunity to capitalize on the significant community support that now exists for stronger national climate change and energy policies,” Kim Farrant, environmental, social, and governance (ESG) head at pension giant Hostplus, said in an emailed response.
Farrant, who has spent more than a decade in the sustainable investing industry, started her position just this month at the superannuation fund, which is one of the nation’s huge retirement programs. It’s the first time a standalone role was created for ESG investing at Hostplus, one of Australia’s largest company pensions with A$53 billion (US$34.7 billion) in assets under management.
The superannuation fund is looking to expand responsible investing opportunities for its 1.2 million members outside public securities, including a wide range of asset classes, such as shares, property, fixed income, infrastructure, alternatives, and cash. Its socially responsible investment portfolio also excludes companies that generate most of their revenues burning thermal coal and oil sands.
Whether those efforts are enough to assuage critics, who believe pension funds have done too little, or to mitigate the current global carbon emissions caused by human activities, is another story. Climate change from here on out is only expected to get worse, with global temperatures forecast to rise 2.5 to 10 degrees Fahrenheit in the next century. Climate related disasters such as the bushfires in Australia or the wildfires in California are expected to accelerate as well.
“The decade between 2020 and 2030 is the critical decade for action on climate change,” said Brynn O’Brien, executive director at the Australasian Centre for Corporate Responsibility (ACCR).
When it comes to ESG performance, Australian funds generally hold their own internationally, according to global indexes from research firm Morningstar’s Sustainalytics program.
In a ranking of countries by ESG scores, Australian funds placed in the second tier out of five, meaning the country failed to beat developed markets in Europe—such as Denmark, France, and Spain—which came out on top.
But Australia still performed better than the largest markets such as the United States, or even China, the latter of which came in at the tail end of the Morningstar report’s ranking. Chinese companies including China Resources Gas, Guangdong Investment, and PetroChina are laggards when it comes to Morningstar’s ESG criteria.
That may not matter much to pension members, who are more aware than ever before about the role climate risk takes in their portfolio. Pension funds like Future Super have reported seeing a greater appetite for ethical investing from Australians, according to an emailed response from the fund’s managing director Kirstin Hunter.
In November, a 24-year-old pension member sued his $57 billion superannuation fund, the Retail Employees Superannuation Trust, for allegedly not disclosing climate risks.
And this month, a report from the ethical investments group ACCR said Australian support for shareholder proposals on climate change dropped to roughly 15% last year, down from 19% in 2018. According to O’Brien, the executive director, the results could be indicative of institutional investors making concessions to maintain access to company boards.
“We think that’s very wrongheaded, and that it must change,” O’Brien said. “The time for tea and biscuits engagement is over.”
Instead, O’Brien said, the clearest example of funds achieving climate change outcomes are the plans in which CIOs are directly involving themselves in ESG decision-making and engagement, rather than adopting a plan for divestment.
A Mutually Exclusive Relationship
Ultimately, institutional investors aligning their portfolios with the Paris goals typically come to a fork in the road: To divest from fossil fuels, or not? In Australia, which is a major coal exporter with a growth rate that’s typically higher than the rest of the developed world, the notion of cutting off all investing in fossil-fuel companies seems to be too drastic. So many prefer to press for change as shareholders.
Proponents of the divestment model argue that sustainable investments and an investor’s fiduciary duty to workers and retirees need not be mutually exclusive. They say that there is no evidence that fossil fuel divestments have an effect on gains. And they also point to extreme weather events, such as Australia’s bushfires, as examples of poor exposures in a portfolio if climate risks aren’t properly screened.
Some funds, like Future Super, also argue that no amount of shareholder engagement will change a fossil fuel company’s core business model, which they say is in environmental degradation and emissions production. “Cutting the flow of capital to these companies is the only responsible approach,” the fund’s managing director Hunter said.
Many pensions and endowments just in the past year, particularly in Europe, have divested from coal, oil, and gas companies. In January, New York City’s pension fund leaders said they will come up with a plan for coal divestment this year. A number of American colleges, including Georgetown, Syracuse, and Middlebury, have made strides to divest from fossil fuels.
But other investors argue that divestment does not fix the problem. Screening unpopular equities can cause company valuations to fall, they say, meaning more public businesses may shift to private markets where they have the advantage of lower reporting obligations.
“That can ultimately hurt transparency and impact everyone’s ability to engage with management on climate change,” Hostplus ESG head Farrant said.
There are plenty of US state pensions that agree. The California State Teachers’ Retirement System (CalSTRS) has been particularly vocal about how it feels about fossil fuel divestment, calling it a “last resort action” that can negatively influence the fund.
Collaborating With Companies
Instead, some pension plan leaders argue that active involvement is a better strategy to steer companies toward reducing carbon emissions. A number of initiatives, such as the Climate Action 100+, help funds engage with companies to align their businesses with Paris goals.
There’s strength in numbers when meeting with company boards or management, so Farrant advised funds starting out to collaborate with other asset owners to use their collective voice.
“When you’re collaborating with others, you are a significant shareholder, you do have a significant voice, and that is why engagement has been able to achieve these sorts of significant outcomes,” Farrant said, referring to engagement projects that pushed energy giant BP to commit to be carbon neutral by 2050.
Other examples include Vision Super’s CIO Michael Wyrsch, who oversees the $10 billion fund and helped push shareholder engagement into BHP Group last year, putting the heat on the mining company for funding coal lobby groups. BHP left the World Coal Association in 2018, but O’Brien said the campaign is ongoing.
“If you have a climate conscious CIO who will apply the CIO’s mentality, and also the power that they occupy within an institution, to the task of engagement, they can elevate an engagement from a process-driven engagement to an outcomes-driven engagement,” O’Brien said.
Assess Your Portfolio
For many pension funds, mitigating climate change could start with simple steps such as communicating with clients on how they’re planning on ramping up their efforts.
In regards to extreme weather events like the Australian bushfires, chief investment officers reviewing their asset allocations for climate change can consider these questions: How quickly can companies in your portfolio transition to a low carbon economy? How would they adjust to policy changes?
“Essentially, your investment strategy needs to be well-equipped to deliver strong returns in a range of environments, including those impacted by climate change,” Farrant said.
For financial firms like Ernst & Young—which have a relatively small carbon footprint compared to, say, energy companies—a plan to cut emissions may mean cutting air travel for employees. The accounting firm said last month that it plans to go carbon neutral by the end of the year.
By comparison, it’s much harder to assess how an oil and gas company could adjust to a low-carbon economy. But here, too, there are a couple of industry leaders. In Portugal and Spain, oil and gas producers such as EDP have cast themselves as climate change leaders. How? By shoring up on wind farms and other forms of renewable energy, while also setting targets to eventually retire coal plants.
Investors should also consider physical risks in their portfolios. Funds with greater real asset exposure might want to take a closer look at, say, their timber assets and consider whether they’re susceptible to extreme weather events.
That may help communities before a climate-related disaster strikes, which can impact them for years. According to one estimate, the financial recovery from the Australian bushfires is expected to reach A$100 billion, or US$66 billion.
Says ACCR’s O’Brien: “The economic legacy of bushfires is here.”
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