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AustralianSuper finds companies exposed to transition risk

Dan Purves




AustralianSuper is using carbon footprinting in listed equities to identify those companies most exposed to transition risk, so that they can engage and manage the risk.

Transition risk is the one of two high level risks (the other being physical risk) that the $100 billion superannuation fund has flagged in relation to the impacts of climate change on the portfolio.

“The transition risk really houses the constraint of fossil fuel consumption, and this applies in two ways; policy and technology,” Kelly Christodoulou, environment, social and governance manager of investments at AustralianSuper, told delegates at AIST’s Superannuation Investment conference.

The policy part relates to carbon trading, tax and improved compliance standards.

“Indeed, following on from the Paris agreement we expect to see more policy both here in Australia and overseas,” Christodoulou said, adding the technology side included development, disruptions and renewables taking more of the market.

“We know policy is coming but we don’t know what it is or when exactly it will be. We know that climate variability is coming but we don’t know what it is, and when it can hit.

However, this uncertainty is not an excuse to do nothing; in fact, it creates greater impetus for all of us to do something – we need more research and reliable technology.”

Every two years AustralianSuper commissions an external service provider to conduct carbon footprint assessment on its equities portfolio, with the most recent completed in December of last year, though Christodoulou cautioned that as only about half of companies disclosed their carbon footprint it was important to be comfortable with the methodology used.

“Our portfolio was 10.63 per cent less carbon intensive [than the last assessment].”


Two ways for trustees to think

According to Christodoulou, there are two main ways trustees can think about the transition to a low carbon economy – the top-down approach or the bottom-up approach.

The top-down approach sets limits on the portfolio, for example, by specifying a reduction in carbon by X per cent in the equities portfolio or by having an X per cent allocation to green bonds, whereas the bottom-up approach is integrating issues into the valuations of assets of companies.

“At AustralianSuper, we have gone the bottom-up approach because we believe that it works very well with our active owner strategy and this is how we are transitioning our fund to a low carbon economy.”

The first way this is done is by having considered investments, informed by carbon footprinting and development of materiality assessment, as well as engaging with fund managers.

Secondly, AustralianSuper is aiming to improve the integration and consideration of the low carbon economy at the company level, through direct engagement with both the companies and fund managers.

Thirdly, it has investments that exclude high fossil fuel companies.

“What I like to stress is we are at the start of a journey and we don’t have the answers, but we are on a journey to building our knowledge to understand how this impact members,” Christodoulou said.