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.

Lyndon: Hello and welcome to Super Informed Radio, the official UniSuper podcast. I'm Lyndon.

Tania: And I'm Tania.

Lyndon: Well, Tania, UniSuper recently released its latest climate risk report which is called Climate risk and our investments. It's now available on the website for members to read and it is a big one. It is one of the most comprehensive reports of its type in the country, and it outlines how we manage climate risk, what we're doing about it, and how we're progressing against our targets.

Tania: That's right, Lyndon. Listeners might remember that last year, we formally committed to aligning with the Paris Agreement, which in plain English means we've committed to being a net-zero emissions fund by 2050.

Lyndon: It is a big target, Tania, that's for sure. But how are we actually going to get there? What have we done so far, what are we doing now, and what's next? Well, to answer these questions and more, we're joined by UniSuper's Chief Investment Officer, John Pearce. John, welcome back to Super Informed Radio.

John: Hi, Lyndon. Hi, Tania.

Tania: John, this is the fourth climate risk report we've done. Your team has worked super hard on it and you're obviously very proud of it, and of course, your team's achievements. Could you take us through some of the key highlights?

John: Well, Tania, as Lyndon said, it is a very comprehensive report so there are many highlights. And I think the focus will be on the fact that we have halved fossil fuel exposure from about 5% to around 2.5% of the fund. And we've got less than 0.5% exposure to the extraction industries, which is a pretty critical statistic. Now, while that will get most of the attention, it's actually not the highlight that we're most proud about.

The one that we're most proud about is the fact that our engagement efforts are really bearing fruit. And this is engagement with companies. For example, we have a traffic light report, and if a company has not committed to alignment with Paris—that's net zero 2050—that company will be awarded a red traffic light. And I'm so proud to say that of our top 50 Australian investments, only three companies currently have a red traffic light. They are not heavy emitters and I'm very confident that they will have either amber or green traffic lights next year.

If you put that in perspective, it wasn't that long ago when hardly any companies were committing to alignment with Paris. We're most proud of this because our engagement efforts, along with the engagement efforts of other funds, is the way we can affect a reduction in real-world emissions. And when we see stats like that, that's why I'm getting more and more confident that we will indeed hit our net-zero targets.

Lyndon: John, you mentioned there that there's obviously that fossil fuel exposure reduction, it's halved. How has that actually happened?

John: Let's see what we're trying to achieve here, Lyndon. We're trying to identify companies that we believe will really struggle to make that transition in their business model in a decarbonising world. Companies like Woodside, Enbridge, TC Energy, we think will find the transition really difficult. We're identifying those companies, and quite frankly, we're divesting. So you've seen massive reductions in those holdings. Together with that, as the funds in inflow, we are avoiding additional investments in companies that we feel are going to struggle with the transition. So a combination of divestment, plus not adding as the fund's growing, you're seeing that massive reduction.

Lyndon: When you talk about the divestment side there, John, I noticed in the report that we've eliminated from the fund companies that generate over 10% of their revenue from the extraction of thermal coal. Are you able to tell us a little bit more about that as well?

John: What you see is what you get there, Lyndon. We believe that thermal coal, under any sustainable scenario, is going to represent the greatest chance of being a stranded asset. So to manage transition risk, the first thing you'd look for is what assets are most likely to be stranded, and make sure you got little to no exposure. And thermal coal well and truly fits within that bucket.

Tania: Excellent. As always, John, thank you for speaking with us. We really appreciate you taking the time and we'd love to have you back on the podcast again sometime soon.

John: Can't wait.

Tania: It's time to peek a little further behind the curtain now. We've got Sybil Dixon with us from John's team. Sybil's the Governance & Sustainability Manager here at UniSuper, and she probably knows the ins and outs of the climate risk report better than anyone. Sybil, welcome.

Sybil: Thank you, Tania. Thank you, Lyndon. Lovely to talk to you today.

Tania: Sybil, one of the targets we set ourselves last year was for our top 50 Australian investments to have Paris-aligned targets by the end of this year. And John already mentioned that 40 out of the 50 are meeting our expectations, which is fantastic—but does that mean that we failed on our target?

Sybil: We'll wait until the end of the year to see the final scoreboard with respect to this target, but let's just take a step back and kind of clearly articulate what our expectations of companies are. To meet or to get a green traffic light, companies need to have set Paris-aligned operational targets. This could be either a net-zero target by 2050 or earlier. It could be a science-based target initiative endorsed targets—the SBTi—or at least a 45% emissions reduction target by 2030.

This has been an area of specific focus for the whole investments team. It reflects a fairly significant shift in our approach to engagement where we're seeking specific outcomes and we're measuring and reporting on that particular progress. We've been really pleased with the progress that we've achieved and how constructive these engagements with companies have been. We've chosen to use net-zero as a target, as sort of the headline target, as it aligns with what we're starting to see at a global level, and it sets a really clear vision for the future. It takes away some of the noise that you can get around target-setting, such as absolute versus intensity measures, what are the benchmarking areas, and all of that sort of thing.

Companies have really welcomed the clarity around what our expectations are. While we firmly believe that companies are best placed to manage these risks, being able to clearly specify what constitutes a green light and what our expectations are did help in the target-setting exercise within organisations, and often kind of shifted something that might have been, you know, number six out of the top 10 things that they needed to do, to maybe a number three—which meant we can see targets have been brought forward or set a little bit earlier than they might have done otherwise. And it's just really important to say that this is just a starting point. We're going to continue to engage to work with companies to seek greater ambition and we'll track emission reduction progress into the future.

Lyndon: John spoke about this a little earlier, but I did see in the report the traffic light reporting system for the top Australian companies which indicates how they're going against our targets and expectations. Can you talk us through that in a little more detail? I saw, for example, lots of green lights, but there were still a few red ones in there.

Sybil: Sure. I spoke through what our expectations were before. Green means that the company has met our expectations for Paris-aligned operational targets. Amber means that a company has set targets that may be reasonably ambitious but don't quite meet our expectations, or that they're likely to meet our expectations by the end of 2021. For a couple of the companies, such as Seek, they had committed to set targets, and indeed they've actually set targets in the last month, but we needed to set a deadline at some point in time where we had to sort of close the books for the purposes of our reporting. Lastly, we've got red for the laggards. They haven't set any targets and aren't likely (or they haven't promised) to set targets by the end of this year.

Lyndon: What does it actually mean for the companies who do get a red traffic light?

Sybil: We'll consider the red traffic lights on a case-by-case basis. At the moment, the companies are CSL, Aristocrat, and Qube. Each of these companies have quite a different decarbonisation challenge and some will find it easier than others.

Tania: So in terms of these companies, what do we want to see from them?

Sybil: We do still want to see targets from them, and we'll continue to engage with these companies to get targets. We actually do think our engagement has been being quite constructive. For example, with CSL, they are planning on having targets out by the end of 2022, but our target is for the end of 2021 so it's not going to meet our deadline. If companies do not set targets over the next couple of years, we may escalate our engagement, and that'll include action such as supporting shareholder resolutions, voting against company directors, or even considering divestment—especially where we think a lack of action represents a material risk for the company.

Tania: From that point, John mentioned that our property investments are going to be net-zero by next year. Could you tell us a little more about this? What does it actually mean when we say property investment?

Sybil: UniSuper invests in property in a number of ways. Many of our holdings are through listed and unlisted real estate investment trusts, but we also invest directly where we own properties in our own name, and we employ a manager to manage those properties on our behalf. This portfolio, which we call our direct property portfolio, is worth about $2.7 billion and includes investments in office towers in Sydney and retail shopping centres, such as Marrickville shopping centre in Sydney and Karrinyup shopping centre in Perth.

Tania: Now that we've specified that, what are the actions that are being taken and how are we going to get to net-zero?

Sybil: We challenged our property manager, AMP Capital, to set a net-zero target for our portfolio and to come up with a roadmap to achieve this target as soon as possible. Energy efficiency, this absolutely is the heart of emissions reduction and includes things like installing LED light bulbs, replacing air conditioners with like latest technology, low greenhouse gas refrigerants, and those sorts of things. Then we also had onsite renewable energy generation where possible. We recently did a redevelopment at Marrickville Metro in Sydney and installed onsite solar panels to meet some of the centre's demand.

AMP then sourced grid-sourced renewable electricity, and this contract will be starting from the beginning of next year. AMP has contracted for 100% of the east coast electricity demand to come from this renewable source. We are using carbon offsets for what’s left over. We see that offsets are an interim measure, and we'll rely less on these offsets as we go forward. For example, we can't get supply-linked renewable contracts for our Western Australian shopping centre Karrinyup at the present time so hopefully, in the future, that will come on board. And also when fuel switching occurs. So they're the sorts of things that we are currently offsetting that in the future we'll aim not to.

Lyndon: Now more than ever, members are interested in understanding their own carbon footprints and also the carbon footprint of their superannuation. So how can members find this kind of carbon footprint information in the climate risk report?

Sybil: Now, Lyndon, this is actually one of my favourite parts of the report, and I'm yet to see many other funds provide this level of detail for investment options. In the option summaries, which is roughly from about page 40 onwards in the report, we publish the carbon footprint for each option. This footprint represents our holdings in the equity and debt of companies as distinct to other holdings such as cash, futures, and sovereign bonds. We then consider our holdings in a particular company and then divide that by the enterprise value. So we can have a way to sort of apportion the emissions of a company to our particular investment. We then multiply that holdings amount by the scope 1 and scope 2 emissions of the company. We then add all of the company emissions for each option to come up with an option footprint. We then use this figure to come up with a number of emissions per $100,000 invested so members can calculate the intensity of their own holdings. And then we also compare the emissions to a representative benchmark for each option. It allows members to kind of really get a good understanding of the emissions intensity for the options that they are invested in.

Lyndon: So, for example, Sybil, if someone happened to be invested, let's just say our Balanced investment option which is our default investment option for many members, from what you are saying, they could actually go into this report and have a look at the Balanced investment option and say ‘how much have I roughly got invested?’ and then, you know, use the figures in the report to then arrive at off carbon footprint. Is that fair to say?

Sybil: That is completely correct, Lyndon. I'm looking at the report now and the Balanced option is on page 42. If you had $100,000 invested in the Balanced option, the carbon footprint of your holdings would be 6.59 tons per annum of carbon dioxide equivalents.

Lyndon: Is that a lot or is that very, very low?

Sybil: It's not very, very low. It's 41.9% below that of a benchmark which is made up of the same ratio between Australian and international securities. We use the emissions of the carbon intensity of the ASX 200 and the MSCI World to come up with a benchmark portfolio, and we compare the emissions that we have for our Balanced portfolio with that benchmark.

Lyndon: It's very involved! And, of course, all the calculations and limitations and sources and references and all that sort of stuff is covered off in the report, isn't it?

Sybil: It certainly is. And if you've got any further questions, please email us around some of these details. One of the challenges in producing a report like this is striking a balance between too much information and being readable. So that's always a challenge—it’s a fine line that we have to walk every time we make a report like this.

Lyndon: Lastly, Sybil, John spoke to this a little bit earlier when we were talking with him, but how confident can members be about UniSuper's ability to be net-zero by 2050?

Sybil: Lyndon, every year I get a little bit more hopeful that we'll be able to meet this target. We’re seeing targets being set at national levels that will really spur decarbonisation. We’ve had the US come out setting a net-zero target, but there's a really long way to go and we do need to see a complete transformation of the systems that make our lives what they are. We're really excited by the challenge though, and we’re using every opportunity to support and encourage companies to not just reduce their own emissions, but also looking at their supply chain and seeing how we can really fundamentally transform the systems that make up our economy.

Tania: Sybil, as always, we love having you on our podcast. Thank you so much for coming to chat with us today and a massive congratulations on the report, it really is worth a read.

Sybil: Thanks, Tania. Thanks Lyndon. Any time.

Tania: And that's it for this episode. If you'd like to read the report that John and Sybil were talking about, it's called Climate risk and our investments. It’s available on our website right now, just head to unisuper.com.au/responsible.

Lyndon: That is right. And you will find a heap of great information on that page, actually, about how we manage climate risk, our approach to responsible and sustainable investing more generally, and of course, the report itself. So happy reading and we'll see you next time.

Tania: Bye for now.

 This podcast is of a general nature. It doesn’t take into account your personal financial situation, needs or objectives. Before you make decisions about your super, we recommend you seek financial advice and consider the product disclosure statement that’s relevant to you. The past performance of the investment options we discuss isn’t indicative of their future performance, and by talking about certain companies, we’re not endorsing them for inclusion in your personal portfolios.

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