Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.

Rob: Hello and welcome to another episode of Super Informed Radio, my name is Rob.

Lyndon: I'm Lyndon.

Marta: And I'm Marta. And we're all a bit excited here, aren't we guys?

Lyndon: We are a little excited, Marta. Would you like to tell the listeners why?

Marta: OK, if I must. Well, we're off the back of a really exciting award win from the AIST Awards for Excellence.

Lyndon: Now the AIST is, Marta, the Australian Institute of Superannuation Trustees, am I right?

Marta: You would be correct. And we're very humbled and very proud to have gotten this award for Best Digital Campaign for the podcast and for our Five Questions for the Chief Investment Officer videos, which I would recommend our listeners go check out on our website.

Rob: And a big thank you to our listeners and our members for viewing the CIO video and listening to our podcast which we believe has been a resounding success since its inception. So thank you so much for supporting us along the way.

Marta: It means a lot. So shall we get cracking on to our topic for this month?

Lyndon: Why not?

Rob: Indeed.

Marta: So investing responsibly can mean a lot of different things to different people. Some people may not have thought that the environment or climate change has anything to do with super funds and retirement savings, but they're actually very closely linked. Have you guys heard of environmental, social and governance before?

Lyndon: Well, Marta, actually, we had heard of this thing we call ESG—environmental, social and governance issues—but we hadn't really done the deep dive, I think it's fair to say, Rob, into the ins and outs of it. So, ESG issues can have investment implications for organisations like UniSuper. Now, I guess that fact alone might sound simple enough but as you'll soon hear, it's actually a pretty complex and fascinating area.

Rob: It is indeed. So to help shed some light about how this all works we spoke with Talieh Williams, our Manager of Governance and Sustainable Investment here at UniSuper, along with Senior Investment Analyst Sybil Dixon who works with Talieh, to get a bit of an insight as to what their role entails, some of the things that they're actually involved with in managing ESG. We also look at some of the considerations that underpin who we invest in and why do we invest in certain ways. And what are some of the frameworks around ESG issues that go across the whole fund.

Lyndon: And so for members with an interest in this area, and there may well be many of you out there listeners, in listener land—we also cover off how you can get involved too if you want to.

Marta: Sounds good. Should we jump straight into it?

Rob: Yes.

Lyndon: Let's do it.

Rob: OK, welcome, Talieh and Sybil to Super Informed Radio. Would you be able to tell us a little bit about what it is you do here at UniSuper?

Talieh: Yeah, sure. So it's Talieh speaking right now. I've been with UniSuper for the last decade and head up the environmental, social and governance team within our investments department. And we work across all of the asset classes and all of the investments that UniSuper has. And it's quite a big job, so a couple of years ago Sybil joined me to help out with ESG and investments at UniSuper and we really focus on four key areas of work. So, Sybil, you might like to talk about a couple of the things we focus on and then I'll jump back in.

Sybil: So one of the key areas that we look at is active ownership. Now, this is really important for a large super fund such as UniSuper. And that's communicating to the companies that we invest in, what we view as acceptable practice, in essence. And it's also voting our shares in the proxy in the [Annual General Meetings] that companies hold. That's one of the critical elements of being a large institutional investor in Australia.

Talieh: So if you were to come into our reception on any given day during the week, you'd probably find the Chairmen and the CEOs of some of Australia's largest companies coming in to meet with us. And as Sybil said, we talk about a range of environmental, social and governance issues that might be arising at those companies as well as a range of broader, other commercial considerations.

And it's really, really important for us to be able to try and use that influence to guide those companies in ensuring that they have appropriate practices in place. Because it's really important to us from an investment and risk management perspective, but we also know it's really important to our members that we're investing in responsible companies.

Lyndon: Now Talieh and Sybil, you've mentioned ‘environmental, social [and] governance issues’ and we've heard the term ESG. So let's maybe just unpack that a little bit more. As a thing that UniSuper's focused on, can you take us through a couple of examples of environmental, social and governance? What does it actually mean for us?

Talieh: Sure. So I might set the context first because there is, as you said, lots of different terminology out there. So ESG is an abbreviation for environment, social and governance. And it's really important to distinguish between the broad approach UniSuper has to ESG in its investment process, and then the targeted approach we take to our sustainable [investment] options. So we might first talk about ESG in its broader sense and then we can do a deep dive into how we look at our dedicated sustainable options.

Lyndon: Brilliant.

Talieh: So from an environmental perspective, we're really looking at how a company impacts the environment within which it operates. So is it creating pollution? Is it creating a lot of carbon emissions which contribute to climate change? How is it managing its waste? What impacts does it have on biodiversity? And those things can really also have quite significant financial implications.

So yes, they're very, very important from an environmental protection perspective. But if a company gets those things wrong, it can actually impact it financially. So for example, Orica, the large chemicals manufacturer, a few years ago, had some unauthorised pollution events which were in breach of its EPA license which is not good. But in addition to that, the plant was shut down by the regulators for three months and it resulted in about $100 million worth of lost production.

So it's a really clear financial impact and it affects our investments which we don't want to happen. And then from a social perspective, that's really looking at how a company interacts and impacts people, so both as workers but also the communities within which it operates. And absolutely fundamental to us from a social perspective is occupational health and safety. It's absolutely number one. We don't want to see people being killed at the companies in which we're investing or being seriously injured.

And it's also really important because it provides a really good proxy for broader risk management practices. So if a company isn't managing safety well, it then flags in our minds, "Well, what else is this company not managing?" Sybil, what are some of the other social things we look at?

Sybil: So more recently which you would've seen in the news, things like data security and privacy. Technology and data collection is pervasive in just about every single aspect of our lives. And it's really important that companies that are collecting that data are protecting it and are using it responsibly or are communicating clearly to their users how that information is being used. So that's really important.

We also consider human rights more broadly. One area that has been really contentious in recent time in relation to technology is the use of cobalt supplied from the Congo for example. Now these sorts of supply chain issues, whilst they can be somewhat difficult to apply more broadly, it does provide us with a topic by which to engage some of the companies that we invest in to make sure that they're trying to do their best to ensure that these practices aren't prevalent in the materials and products that they are using.

Talieh: Because not only do we want to be investing in responsible companies but that doesn't just mean you look at the company you're investing in but you look as far up its supply chain as you possibly can to make sure that they have ethical and responsible sourcing practices and policies in place.

Sybil: Part of sustainability is making sure that your supply chain is sustainable and that people are being paid fairly for the work that they're doing. So we see that as just a fundamental part of being a good business, is making sure that you are not profiting on the abuse of others.

Talieh: And some of the other social things we look at might include corporate culture, which is often really difficult to determine, but it tells you so much about a company and its ethical ways of operating in the framework within which it's governed and makes decisions.

And so to try and get an understanding of culture, we look at things like employee engagement, staff turnover, diversity programs in the workplace to really get a sense of what that organisation is like to work within. Because the way a company treats its employees can then often tell you quite a lot about how it treats its other stakeholders, whether they are investors, suppliers and so forth. So that social element in its broadest aspect is just absolutely really critical to us.

And then the ‘G’ stands for governance. And we really see the governance being the umbrella under which everything else sits. And when we're looking at corporate governance, it's really looking at the policies, systems, practices and processes in place by which a company operates and fundamental to that is the Board of Directors.

So we take very seriously the appointment of directors to the Board. And where we have concerns over those directors we will vote against their reappointment at the company annual general meetings because ultimately the directors are like the captain of a ship. They steer the organisation and they set the tone from the top. They're responsible for hiring the CEO and also for firing the CEO when it's time to go. And they're also responsible for setting the executive remuneration practices at an organisation.

And we recognise that companies often do pay their executives very large sums by our standards. And we don't specifically have a problem with executives being well paid, but we do have a problem with very high levels of remuneration for poor corporate performance. And so we want to see that alignment. So if we as a shareholder are not getting good returns we then query why the executive should be. So there does need to be that alignment.

Rob: So many considerations with ESG investing. Goodness [laughs]!

Talieh: And there's only two of us!

Lyndon: So you mentioned before that there were, kind of, two aspects to this. One was ESG as a thing generally, and the other is how we apply it to investment options.

Talieh: Sure.

Lyndon: So what did you mean there?

Talieh: So when we're looking at ESG we try to consider the ESG risks in every single investment decision that we make so that we understand what we're investing in. And it provides us with another lens by which to view a company and the quality of that company, and we do that across all of our investments. But that also means that we still do invest in alcohol companies and mining companies, which we know some members are not happy with even though we are assessing and understanding the risks.

So for the last, almost 20 years, UniSuper has offered sustainable options to its members. And these options adopt a higher standard. So yes, they have active ownership elements and we consider corporate governance, but we also invest in a smaller pool of assets. And so we apply a negative screening process and a positive screening process. So, Sybil, you might want to talk through that process.

Sybil: So for our sustainable options, we've chosen—based on consultation with a wide group of UniSuper members...

Talieh: And broad responsible investment practice just out in the industry.

Sybil: …we've chosen to exclude alcohol, gaming, weapons, fossil fuel exploration, and production—so, explorers and producers.

Talieh: And we should say we exclude tobacco from the entire fund, and were the second fund in Australia to do so in 2012. So that's automatically out of those options.

Rob: Yeah, great.

Sybil: So by screening out those sectors which are probably the sectors that we get the most amount of engagement from our members [on], we give members the choice to avoid those sectors if they wish. But then we also apply a positive screen in which we choose to invest in companies that are better performers from an ESG perspective.

Talieh: So we get rid of the bad stuff and then we try to invest in the better stuff. But that still means that we'll be invested in large companies such as a Nestlé, which some members might have concerns about because they had some scandals in the late '70s regarding infant formula. But today they're actually a best in class, global leader regarding sustainability. So a company like that would be in the sustainable options because it's not alcohol, it's not gaming, it's not weapons, it's not fossil fuels. And then it's rated well as compared to other companies in that sector.

Sybil: And when it comes to the levels of exclusions that we have to the contentious sectors, we will invest in say, a real estate, say, Scentre Group which owns the Westfield shopping centres in Australia despite the fact that they may lease some areas of their tenancies to, like, a Liquorland. But we do not invest in Woolworths or Coles that own the Liquorland or the Dan Murphy's, by way of example. With respect to weapons, we apply a very diligent screen. We consider how each company is involved in the weapons manufacturing arm. So for the sustainable options with respect to weapons, we're quite strict. But, for example, one company that gets pulled up with respect to weapons is OLED, O-L-E-D, which makes the LED screens that are used in, say, iWatches, in personal computer products. They also make stuff for the military. We will include that company in our universe for the sustainable options because its product is not made exclusively for the purpose of weapons. It's just, it has another application.

Talieh: And so we mentioned we have two sustainable [investment] options on offer. So we should differentiate between the two. So there's a Sustainable Balanced and a Sustainable High Growth. The Sustainable High Growth only invests in equities, whereas the Sustainable Balanced option also has a fixed income allocation and a really significant part of that fixed income allocation is to green bonds.

So we're really trying to target that investment to projects which are delivering really good environmental benefits through renewable energy projects, energy efficiency projects. And with a green bond, we're essentially providing debt finance to fund the development of those projects. So the [Sustainable] Balanced option has green bonds, the Sustainable High Growth [option] does not.

And we also have, in addition to those two sustainable options, a Global Environmental Opportunities option and that was introduced to our members in 2012. And it's now got over $600 million invested in it, starting from zero five years ago. And that option differs from our sustainable options in that it seeks to only invest in companies that are focused on delivering an environmental solution to some of the challenges that we're facing globally.

And it really focuses on five key thematics which are energy efficiency, renewable energy, clean water, pollution and waste control and green building. So it's a very targeted thematic portfolio.

Sybil: It's a global portfolio and it only invests in equities, so it's quite a high-risk portfolio. But this is a theme that we believe gives members the opportunity to invest in some of the more exciting technologies that are coming across the board.

For a company to be considered for this portfolio, it needs to have more than 50% of its revenues from the targeted sectors.

So for example, if we're talking about companies that everyone knows, if we compare a Tesla to a General Motors—two of the world's biggest electric car manufacturers—Tesla is eligible for inclusion in the portfolio because 100% of that company's revenues comes from the green themes. Whereas General Motors—despite probably having as many cars being produced that are fully electrified—is not, because it only represents 4% of its revenues, just because the company in and of itself is so much bigger.

Lyndon: So do you get a lot of enquiries from members complaining about UniSuper or asking us questions—what are we doing, and all of that sort of stuff?

Talieh: We do, so one of the wonderful things about UniSuper's membership base is that they are incredibly engaged regarding ESG and sustainability issues. And when I joined UniSuper a decade ago, we would maybe hear from a member on an ESG issue on an ad hoc basis every six months or so. And then it became every three months, and then every month, and then every week, and now it's daily.

And we've also had targeted civil society activist campaigns run against us. And it can be really challenging because we do genuinely try to do our best by our members in terms of managing ESG and sustainability issues and it can be a bit confronting when people are really unhappy with what you're doing.

So we do sometimes get constructive feedback from our members and certainly lots of questions. And we try to be as transparent and open with our members about how we invest and why. And ultimately, UniSuper is a regulated superannuation fund and we have a fiduciary duty to act in our member's best financial interests, but that doesn't mean we can't look at ESG and sustainability issues. They are a factor that we do look at, but we can't just exclude things because people want us to, particularly if there might be a financial impact.

So, therefore, we have that mainstream approach to ESG but then we also, in providing for member choice, have those targeted three sustainability and environmental options on offer for our members. So they can either elect to be in our mainstream options or they can, if they’re an Accumulation member, put their superannuation into the sustainable or the GEO options.

Lyndon: Off the top of your head, what types of questions come in from members or criticisms? Can you give us an example of what you would say to those members?

Sybil: We've had a lot recently regarding the banks—the big four Australian banks are considered to be suitable for our sustainable options—where members are not happy that those options do hold the Australian banks because they do provide some funding for mining companies within Australia and the world. However, it is a small proportion of those banks' books. And it's also not a first order or even a second order sort of funding. It is further along the chain.

Talieh: There is a huge divergence in the queries we get from members. So they range from how we're managing climate risk or whether we're invested in fossil fuels or calling for divestment, through to whether we have any exposure to Israeli companies owing to the issues from a geopolitical perspective with Palestinian people, through to whether or not we have any exposure to companies that are conducting stem cell research using human embryos.

And that's a really interesting one because we will have some members who are religiously or philosophically opposed to stem cell research, but being the fund for Australia's higher education sector, we will have numerous members who are scientific researchers conducting that research. And that presents a real challenge because we can't make an ethical judgment because we've got 400,000 members and everyone's ethical framework is going to differ. And I think that stem cell research example probably illustrates that really well.

We've also had targeted campaigns run against us regarding mandatory detention of asylum seekers and whether or not UniSuper was invested in any of the companies providing services to the offshore processing centres. And that was also a really interesting issue for us because UniSuper didn't actually have any investments in those companies that were running those facilities. And we would write back to our members and let them know that we had no exposure to the companies they were asking about. And then these members were very passionate about the issue and they'd write and say, "Well, actually, that's not good enough. UniSuper should be taking a public policy position on this. You should be making political statements about the issues." And as a superannuation fund, it's not our role to be doing that. We're really focused on investing our members' money. And also we don't make it a habit of commenting on all of the companies we're not invested in.

So if we were invested in a particular company, maybe there would've been a greater onus on us to talk about it. But given we weren't invested in those companies, it’s then challenging for us to make comments, particularly given that we're not invested in 65,000 of the 68,000 listed companies globally, so we're not going to talk about all those companies. And sometimes people will be happy with that and sometimes they won't be. But we are always trying to do our best.

Rob: So you mentioned earlier that we have three environmental and sustainable investment options. Have you found that that has lowered the number of queries—that members are actually now satisfied because these options exist?

Talieh: No…

Rob: Or could we be doing more? Is there more coming?

Talieh: I think the challenge for us is that we… so we’ve had the sustainable options, the first one came into place in the year 2000. So getting on for 20 years. And we took fossil fuels out of those options in 2014 to respond to very strong member calls for UniSuper to enable members to avoid fossil fuels.

And I think that provides a really good example because we now have those two options that have no exposure to fossil fuels, as well as the GEO option. As well as a handful of other options on offer which don't specifically exclude fossil fuels, but because of the investment process, they are unlikely to ever have any exposure to fossil fuels.

So I think around seven out of our 15 options on offer do not have exposure to fossil fuels. And we have members writing and saying, "We want to avoid fossil fuels." And we write back letting them know that they can and they will say, "Well, that's not good enough. The whole fund should exclude fossil fuels." And so for many members, the fact that they can avoid something is not sufficient. They would like to ensure that all members are avoiding those things. And ultimately it's not for one or two members to dictate for the 400,000 other members how to invest. And ultimately should those members want to avoid those things, it's open to them to do so. And it hasn't been played out in the numbers of members invested in those funds.

So the sustainable options and the GEO option, year on year, have grown in terms of assets under management and in terms of the members invested in those options. But ultimately, as it currently stands, only around 30,000 members have their money invested in one or a combination of those three options out of 400,000 members. And so if there really were the demand for the entire fund, for example, to be fossil free, we would expect to see hundreds of thousands of members in those options, not tens of thousands.

Lyndon: And at the risk of opening a potential can of worms… so we probably have all heard or seen some of the new funds popping up, you know, exclusively devoted to, say, technology or environmentally themed investments. How does UniSuper fit into that puzzle?

Sybil: So through our sustainable options, with respect to the environmental sort of themes, the Global Environmental Opportunities option is something that is actually quite well aligned with some of those competing products.

Talieh: And we should say we're one of the only funds in Australia to have an environmental opportunities option, in fact, the only one I know of. So we can't definitely say we're the only one but certainly one of the only ones.

Sybil: There are funds that frame themselves in an ethical sort of standpoint, in which our sustainable options would compete quite strongly with those funds. There are a lot of new funds that are, sort of, touting themselves as being digital disruptors coming out. But if you do a bit of digging into what you're actually investing in, you'll find that in the vast majority of cases you're investing in a fairly standard index and paying premium fees.

So with ethical investing or sustainable investing, it takes time and it is a cost. So some of these funds do have higher fees and if they take making a really robust approach to their investment philosophy and they're considering each investment on its merits, then potentially those fees are fair and reasonable.

There are a lot of these new funds that are essentially just investing in index products which are quite cheap to acquire and you're paying these premium fees and not necessarily getting the research, the engagement, what you think you're buying. So all I'd just say is, buyer beware.

Talieh: And we should say UniSuper's—not only our sustainable options and GEO option but across the board—as a profit-for-member fund, the fees are typically much lower than you would expect at a fund where there are shareholders or other individuals making a profit from the fund.

Lyndon: And there's probably a couple of important points our lawyers might like us to just pop in—a reminder there that past performance isn't necessarily an indicator of future performance and also we're not sort of recommending that members jump into any particular option…

Talieh: Absolutely not.

Sybil: Absolutely not.

Talieh: Absolutely not.

Lyndon: …we're simply saying they're available.

Rob: And it is good to be able to offer these options to members.

Talieh: And we'd really encourage members when they're making decisions to come in and meet with one of UniSuper's financial advisors because that will help them make the right decision for them in their stage of life.

Sybil: But also all of the work we do, we do for all of our options. It's not just for the sustainable options. Most of Talieh and I's time is spent engaging, working on our mainstream options. So all of our options do have a lot of rigour with respect to E, S and G. That's where we spend most of our time. The sustainable options do have those other screens. Choosing those sustainable options doesn't mean that you're necessarily getting more ESG. It's just a different way of investing.

Talieh: And a way of avoiding some contentious sectors and having a bespoke target on the higher performers.

Rob: Talieh and Sybil, thank you so much for coming in and for demystifying the whole world of ESG for our members. And hopefully, our members know that these options exist and that they can look to invest in them, split that across other investment options or asset classes.

But to know that we actually have these options for members—whether they’re in [Accumulation or our Defined Benefit Division] because even our DBD members have an Accumulation component to their account—everybody has access to them. So thank you for coming in and sharing some wonderful insights about your world and we really appreciate that.

Talieh: Pleasure. And don't hesitate to email in if you have any questions.

Lyndon: What's the email address there, Talieh?

All: [Laugh]

Lyndon: Thanks so much.

Rob: Thank you.

Marta: So, Talieh Williams and Sybil Dixon from our investments team there. Some really great nuggets and I think it's fair to say that we were just, sort of, scratching the surface there. That interview could've gone on for much longer, couldn't it have?

Lyndon: I think we might have to get Talieh and Sybil back in a future episode of Super Informed Radio, maybe next year.

Marta: I reckon too. If you've got any questions that you'd like us to maybe explore in future episodes, including stuff around ESG, remember you can email us at superinformed@unisuper.com.au.

Rob: And that, Marta and Lyndon, is a wrap for 2017. To our audience, our very loyal audience, thank you so much for all of your support this year. We will be back with more episodes in February next year, 2018. So thank you for listening and keep those questions and suggestions coming in.

Marta: If you'd like to find out more about our approach to responsible investing you can check it out on our website at unisuper.com.au/responsible. Also, if you'd like to catch up on past episodes of the podcast, you can check us out on our website as well at unisuper.com.au/podcasts or subscribe to us through the plethora of podcast apps that are out there like Apple Podcasts, Overcast or Stitcher. Give us a rating as it helps other people find our podcast.

Lyndon: And check out our extensive back catalogue there, I think, Marta—we've got quite a number of episodes there to keep you entertained over the holiday season.

Marta: Like a summer reading list, but for your ears.

Lyndon: That's it. Thanks again for listening and we'll see you next year.

Rob: Bye.

Marta: Happy holidays.

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