First State Super is implementing a portfolio-wide Climate Change Adaptation Plan to increase the fund’s resilience to the direct and indirect impacts of climate change.
The plan has three core elements: portfolio “weather-proofing”; increasing engagement with companies; and potentially investing in renewable energy and related technologies.
“It’s a plan that was approved by the board in October of last year, so we are in the early stages of implementing that,” said Dr Ross Barry, head of investment research.
“You might recall in the middle of last year we announced we were going to exclude fossil fuels from our socially responsible investing options, but the Climate Change Adaptation Plan is essentially our response on the whole-fund level across all our options.”
Portfolio “weather-proofing” involves a detailed, technical review of all the fund’s holdings over time to assess the level of climate change risk exposure and to implement options to increase resilience.
“We’ve really started to focus on our real assets, by which I mean property and infrastructure, and particularly those assets we own directly,” Barry said.
“The idea is to work through our entire portfolio. Obviously it’s easiest to do where we are directly invested in assets, but we are also engaging with asset managers where we hold assets pursuant to a mandate or in a co-mingled fund of any sort.”
The whole-of-portfolio review will be done on a two-year cycle.
In the first instance it will look at the extent to which assets are exposed to extreme events, but beyond that it will look to see how exposed the portfolio might be to policy change relating to carbon or to technological conversion associated with the transition to a low-carbon economy.
“It’s a fairly nebulous concept to think about how climate change might affect a particular holding. So it’s very hard, first of all, to assess what the nature of that risk is. It’s often very interdependent, so the risk often doesn’t turn up where you might expect it to,” Barry said.
He added there are a “whole lot of ways climate change may or may not manifest” across the portfolio and it was not always easy to tell in advance what form it would take, which was why a detailed and thorough review was required.
Divesting an option of last resort
Divesting from holdings that were exposed to climate change risks would be an option of last resort for the fund. It would only be in the event where the fund felt there was very significant risk of loss, typically associated with stranded asset risk, and if the super fund felt the management of the company couldn’t, or wouldn’t, respond to that in an appropriate way.
The fund’s preferred option is to increase engagement with companies to reduce risks associated with climate change.
“Essentially the Climate Change Adaptation Plan informs how we engage with those executives, particularly in the area of how they are addressing issues around emissions, but also how they themselves are managing the risks associated with climate change, whether it be weather related, policy related, or technology related,” Barry said.
On the topic of investing in renewable energy and related industries, Barry said the fund made an investment about 18 months ago into an Asian infrastructure mandate, which was focused on renewable energy in Asia.
“So we’ve got a little bit of experience investing in a range of wind, solar and hydro generation in different Asian countries. We’ve not done that here in Australia, but there are a few things in our pipeline we are looking at,” Barry said.