As asset owners across Asia and the world look how to best implement environmental, social and governance (ESG) standards, one related part has stood above the others: climate change.

The impact of a warming world promises to have big effects on investors’ portfolios, in terms of both investments and risks. 

Leaders in the climate change investing such as New Zealand’s Super Fund believe that reducing exposure to carbon intensity and fossil fuel reserves will make it more resilient. In June 2017, the asset owner transitioned its NZD14 billion ($9 billion) passive global equity portfolio (constituting 40% of the fund) to low carbon, selling holdings in 297 companies worth NZD950 million. 

The investment team re-applied its carbon exclusion methodology in June 2018 and in 2019. It has also worked to reduce the carbon exposure of the fund’s actively managed equity holdings and its emerging markets portfolios. It wants to cut the carbon emission intensity of its investments by at least 20% versus its passive reference portfolio, and cut potential emissions from the fund’s reserves by at least 40%. 

Using carbon footprinting, NZ Super’s 2019 assessment reported that its carbon emissions intensity was 43% lower than the baseline level, and its exposure to potential emissions from reserves, was 52% lower, well exceeding its target levels.

Risk assessment is a key element in their approach. NZ Super CEO Matt Whineray told AsianInvestor, “With each new investment, we consider whether the opportunity is exposed in a negative way to climate change-related regulation, disruption or supply demand impacts. This way, when we think about a new investment opportunity, we consider the degree to which those investments are exposed to climate change risks and how well positioned they are to provide solutions to climate change.”

AustralianSuper also has a climate programme that focuses on how its investments in property and infrastructure, like toll roads, airports and ports, may be affected. It actively engages with companies on the risks relating to future fossil fuel consumption and physical climate changes. 

“Rather than excluding particular investments on the basis of these factors, we weigh the risks and returns for each investment and determine the appropriate exposure,” said CIO Mark Delaney.  

“We consider factors such as the constraints on future fossil fuel consumption, due to public policy actions and technology developments. We want to understand which companies or assets are likely to win and lose, as the economy transforms towards lower fossil fuels.”

PORTFOLIO ENGAGEMENT 

Asset owners tend to pay most attention, and have the clearest message to engage ESG at the portfolio management level. 

AusSuper’s internal equities investment process aims to identify the sectors and companies that can benefit from climate policy changes. “We look at our whole-of-portfolio carbon risk relative to appropriate benchmarks by calculating the carbon footprint of our equity portfolio,” said Delaney. 

Another leading Australian responsible investor is Victorian Funds Management (VFMC). Russell Clarke, chief investment officer, told AsianInvestor its consideration of ESG issues is also entirely investment-driven. “This distinguishes our ESG integration approach from an approach that restricts investments according to ethical criteria.”

He noted that VFMC generally avoids exclusion when investing, but is prepared to do so after it comprehensively assesses a sector’s economic, legal and fiduciary requirements; client concerns, materiality and risk.

These are among the most advanced asset owners in Asia, but expect to see many more placing their credentials forward. “ESG has reached a tipping point and has risen to the top of their agendas,” said Bok.

“We are now at a stage where it is less about the saying-doing gap and more about the doing-impact gap,” she added. “Investors want to be able to measure and understand the impact that their ESG activities are having, as well as the level of climate risk exposure in their portfolios.” 

So what advice would she offer asset owners starting ESG implementation?

“There is no one solution for all. Each institution will need to focus on what fits their current governance level. ESG is evolving, so it’s more important to understand your own beliefs and why you invest the way you do.”

As extreme weather events continue to mount, asset owners will increasingly be asked what they’re doing in response. They should put storm-proof plans in place. 

This story was adapted from a feature article on asset owners and ESG integration that originally appeared in AsianInvestor's Winter 2019 edition.