In the wake of COP26, the UN Climate Change Conference in November in Glasgow, UK, companies are starting to draw up short-term carbon emissions targets. But most are still relying on long-term projections that risk leaving future management teams with an impossible task in years to come, according to two leading Australian superannuation funds. 

The A$155 billion ($111 billion) Aware Super, Australian’s second largest superannuation fund, and A$24 billion LGIA super, said there were too few short-term targets, without which it was hard to see a clear path to long-term goals, such as net zero by 2050. 

ESG targets

“We would like to see more companies not just commit to net zero targets but also set nearer term targets and goals for how they will achieve this aim,” Liza McDonald, head of responsible investment, at Aware Super told AsianInvestor.

McDonald said the fund wished to see wider reporting in line with the Taskforce for Climate-Related Financial Disclosure (TCFD) recommendations.  “We’d like to see more companies – not just across Asia, but broadly – commit.”

“This would improve transparency and consistency [and] …  that would provide important information to investors like Aware Super when considering the long-term viability of the assets we invest in,” said McDonald, noting that voluntary adoption of the TCFD was accelerating. Aware Super released its TCFD-aligned report, Destination Net Zero 2050, in October 2021.

“In general, the market has been focused on 2050 targets,” Fiona Mann, responsible for ESG at LGIAsuper, told AsianInvestor, although she noted that the last few years – and particularly since COP26 in the UK in November – this was turning to shorter-term targets. Failure to formulate short-term targets creates problem for future management teams, who would be left with a lot of ground to cover in little time, she noted.

Mann said LGIA super looked for near-term carbon reduction targets in all of the fund’s property investments. She pointed to the fund’s domestic retail investments, which provide a large part of its domestic property portfolio. She pointed to progress in shifting lighting to LED, increasing the number of solar panels and upgrading chiller facilities, which were huge power consumers, especially in Queensland, where a number of its assets reside.

Regulatory support

In April, Australian regulator APRA (Australian Prudential Regulation Authority) released draft guidelines on managing financial risks of climate change, which were finalised in November. Mann said that this has helped them in approaching trustees, not all of whom may accept the evidence for man-made climate change.

“That gave the industry another real anchor approaching trustees. Whether you do or don’t believe [in man-made climate change] the regulator has strongly directed that you must now must account for the financial risk.”

McDonald says the new guide provided valuable guidance in areas including governance, risk management, scenario analysis, and disclosure. “We also welcome the flexibility [it] provides in allowing each institution to adopt an approach that is appropriate for their size, member base and business strategy,” she said.  

Ports challenge

LGIA super is focusing its engagement efforts on its significant port holdings in Australia. 

 “Ports are typically not strong on either social measures – often lacking diversity – or environmental measures – in Australia they are often moving coal,” she said. She stressed that ESG due diligence needed to include the emissions that ports contributed indirectly:  “You must consider the upstream and downstream impact, including what people do with the coal, which of course can be very hard to accurately articulate.”

A recent focus of the fund’s work has been on modelling the resilience of ports owned by the fund to future rises in sea levels. “We expect the assets to have a plan – do we need to raise [the port], move it back, do we need to build a big wall, lift things higher and so on,” she said.   

Rotation

Manish Rastogi, head of infrastructure with Frontier Advisors in Melbourne, told AsianInvestor that Australian super funds were increasingly allocating to infrastructure investments, such as renewable energy, that contained small or no climate-related risks  

“Our clients have historically looked for air and sea ports and toll roads through Australian managers. Now that they are making or considering net zero pledges, they also want the infrastructure of the future, such as clean energy. Sustainable and energy transition infrastructure [investments] have a bright future ahead,” he said.

Rastogi added that Australian super funds remained surprisingly reluctant to invest in infrastructure opportunities in Asia, favouring direct and co-investment opportunities in the traditional developed markets in Europe, US and Australia. “We have rated infrastructure managers in Asia and we think it’s a missed opportunity for the supers to not invest in  the Asian markets  with strong tailwinds,” he said.