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Aware Super

PRI reporting framework 2020

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ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe We commissioned a report by 427 to undertake a physical climate change risk analysis of our Portfolio to identify assets that may be at risk under physical climate scenarios. We also asked Willis Towers Watson to undertake an initial scenario analysis on our portfolio.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

Scenario analysis can be used to understand the impact of climate-related scenarios on portfolio and asset class returns.

It is important to consider a range of different scenarios to determine how resilient the Fund’s portfolio is to different potential outcomes. The main focus of the analysis should be on identifying risks that would be particularly damaging to the Fund’s portfolio and to consider what actions might mitigate the impact of these events. The TCFD recommends that organisations include a “2 degree scenario” given the agreed international climate change commitments, as well as a “business as usual” scenario, or other challenging scenarios most relevant to an organisations circumstances.

The two scenarios that we have examined are outlined below and described in more detail on the following pages:

Global Co-ordinated Action: this scenario is consistent with the Paris Agreement aim of limiting global average temperature increases to less than 2°C above pre-industrial levels. In this scenario we assume that policy makers agree on and implement policies to reduce emissions and companies and consumers take action to capture opportunities to reduce emissions.
Least Common Denominator: this scenario is consistent with a “business as usual” outcome where emissions as well as social, economic and technological trends do not shift markedly from historical patterns. In this scenario the global average temperature increase is likely to be above 2°C, but less than 4°C above pre-industrial levels.

We note that the above scenarios do not represent the full range of outcomes, nor do they necessarily capture the most adverse possible scenario. We do however believe that analysis of these scenarios provides the Fund with a useful understanding of the potential behavior of the Fund’s investment portfolio in different outcomes.

13.5 CC. Indicate who uses this analysis.

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

Our investment strategy is generally focussed on a ten year period. Our physical climate change risk analysis was based on a 2050 time period. The scenario analysis undertaken by WTW was undertaken with a time horizon to 2030. See more information below:

We note that the impacts of the climate change megatrend will take time to manifest and that more material outputs of this megatrend may only be evident over longer time horizons (for example, from 2050 onwards).

For the period to 2030, FSS is placing high importance on consideration of when climate-related impacts on particular assets could start to see discounted in market pricing. This timing is one of the key uncertainties in translating economic costs of climate change to asset class returns and could potentially be quite rapid, severe and possibly a number of decades in advance of the actual manifestation of the physical impacts of climate change.

Therefore, scenario analysis for the period to 2030 will need to include consideration of much longer-term outcomes in order to capture this effect. To focus only on the changes expected within the time horizon to 2030 will miss the vast majority of asset class return impacts under certain assumptions.

We use the period to 2030 as it is most useful for our clients with 10 to 15 year investment objectives and also the period where the most accurate research is available. We seek to capture the impacts beyond 2030 through our terminal value assumptions at 2030 and beyond (e.g. for equities we assume economic losses continue to increase beyond 2030 and under a Least Common Denominator scenario the market over-extrapolates these impacts by repricing downwards).

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          WTW Global Coordinated Action
        
Other

Other (2) please specify:

          WTW Least Common Denominator
        
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

Specify the AUM invested in low carbon and climate resilient portfolios, funds, strategies or asset classes.

Total AUM
trillions billions millions thousands hundreds
Currency
Assets in USD
trillions billions millions thousands hundreds

Specify the framework or taxonomy used.

We have used the MSCI ESG Manager screening tool to identify companies that contribute to alternative energy; energy efficiency; green buildings; pollution prevention or sustainable water. 

For infrastructure (including debt and equity) we have investments in renewable energy projects which are identified as low carbon solutions.  No specific taxonomy is used.

 

other description

          EOS at Federated Hermes engages companies specifically with a view to enhance disclosure, integrate actions and policies around climate-related risks and investments.
        

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

14.4. If you selected disclosure on emissions risks, list any specific climate related disclosure tools or frameworks that you used.

MSCI Carbon Analytics

14.5. Additional information [Optional]

Some pitfalls of carbon footprinting :

Operated vs equity share data issue:

Many projects are often held in joint ventures or other joint ownership structures. Typically the operator reports 100% of the emissions and the other owners report 0%, however there is often inadequate date to show emissions data in terms of equity ownership. Making this more problematic is the fact that financial data, such as revenues or sales, used to calculate emissions intensity clearly relates to equity share of projects or operations. Thus the numerator and denominator entries are inconsistent and particularly for companies most material in a carbon footprinting exercise energy or materials.

Problems with “revenue” used as the denominator in intensity calculations:

Some companies reported revenue as the net income it receives from associates or subsidiaries, whereas other use underlying revenue. Using reported revenue (likely lower than underlying) will lead to high intensity figures.

Emissions intensities may rise with improved and more complete reporting:

The more broadly companies start to report on emissions, the more likely it will raise their emissions.

Outsourcing:

Emission from a company will be heavily influenced by which activities they conduct inhouse rather than outsourcing. E.g. do hey manufacture or purchase their raw materials?

Estimates for companies who do not report may be erroneous if based on peer group:

 They need to be based on the physical activities of that company, not peers. Eg a peer group may contain raw steelmakers, cement makers and other companies that primarily process raw materials purchased from others.

A portfolio carbon footprint might change from year to year for other reasons outside of holdings or company activities:

Upward movements in commodity prices will increase revenues, exchange rates will affect revenues.  Revisions by company to do more comprehensive reporting and the equity share data issue.

Scope 3 emissions are generally excluded from reporting:

Generally these are excluded due to inconsistencies from definitions and reporting.

Multiple counting:

We may be double or treble counting. Eg a coal miners scope 3, could be the power generators scope 1 and the industrial electricity users scope 2 emissions, and the aluminium can makers scope 3 emissions.  These emissions might be 1005 attributed to equity investors, or inadvertently counted in debt portfolio footprint,


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Climate-related targets
          Reduce carbon intensity and invest in opportunities related to climate change
        
          Various
        
          Various
        
Weighted average carbon intensity
          Measures a portfolio’s exposure to carbon intensive companies. Can serve as a proxy for a portfolio’s exposure to potential climate change-related risks relative to other portfolios or relative to a benchmark.
        
          tons CO2e / $M sales
        
          The Weighted Average Carbon Intensity measures a portfolio’s exposure to carbon intensive companies. Since companies with higher carbon intensity are likely to face more exposure to carbon related market and regulatory risks, this metric can serve as a proxy for a portfolio’s exposure to potential climate change-related risks relative to other portfolios or relative to a benchmark.
Calculating a portfolio’s Weighted Average Carbon Intensity is simple, achieved by calculating the carbon intensity (Scope 1 + 2 Emissions / $M Sales) for each portfolio company and calculating the weighted average by portfolio weight. Unlike the Portfolio Carbon Intensity, carbon emissions are apportioned based on portfolio weights / exposure, rather than the investor’s ownership share of emissions or sales.
        
Carbon footprint (scope 1 and 2)
          Measure scope 1 ﹠ 2 carbon footprint
        
          tons CO2e / $M invested
        
          Scope 1: All direct GHG emissions from sources owned or controlled by the company. Some examples include emissions from fossil fuels burned on site, emissions from entity-owned or leased vehicles.
Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat, or steam, and the transmission and distribution (T&D) losses associated with some purchased utilities.
        
Portfolio carbon footprint
          Measure total carbon footprint
        
          tons CO2e / $M invested
        
          Scope 1: All direct GHG emissions from sources owned or controlled by the company. Some examples include emissions from fossil fuels burned on site, emissions from entity-owned or leased vehicles.
Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat, or steam, and the transmission and distribution (T&D) losses associated with some purchased utilities.
        
Total carbon emissions
          Measures the absolute tons of CO2e (Scope 1+2) for which an investor is responsible.
        
          tons CO2e
        
          Total Carbon Emissions measures the absolute tons of CO2e (Scope 1 + 2)4 for which an investor is responsible. It is apportioned to the investor based on an equity ownership perspective, and can be explained with a simple example:
If an investor’s position in a company is equal to 1% of the company’s total market capitalization, then the investor owns 1% of the company, and is consequently responsible for 1% of the company’s carbon emissions (tons CO2e).
Calculating the “owned” emissions from each position in the portfolio and summing those emissions yields the total carbon emissions for the portfolio.
        
Carbon intensity
          Allows measurement of the volume of carbon emissions per dollar of sales generated by portfolio companies over a specific time period
        
          tons CO2e / $M sales
        
          Carbon Intensity expresses the carbon efficiency of the portfolio and allows institutional investors to measure the volume of carbon emissions per dollar of sales generated by portfolio companies over a specified time frame. This metric adjusts for company size and is a more accurate measurement of the efficiency of output, rather than a portfolio’s absolute footprint.
Although efficiency at the company level is best measured using industry-specific measures of output (e.g. per tons of steel, miles flown, MWh of power generated, etc.), sales are used in the portfolio context as the best available measure of output when comparing across industries.
Portfolio Carbon Intensity is calculated by dividing the portfolio’s total Carbon Emissions (apportioned by the investor’s ownership share) by the portfolio’s total Sales over that same period of time (also apportioned by the investor’s ownership share).
        

14.7 CC. Describe in further detail the key targets.

Target type
Baseline year
Target year
Description
Attachments
          2019
        
          2020
        
          Reduce equity portfolio intensity by up to 50%
        

          2019
        
          2020
        
          Invest in renewables or other low carbon investments
        

          
        
          
        
          
        

          
        
          
        
          
        

          
        
          
        
          
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

First State Super undertook a research project in 2015/16 to understand the climate related risks and opportunities.  This resulted in our Board approved Climate Change Adaptation Plan (CCAP).  The CCAP has taken a total fund view as opposed to individual investment strategies as climate related risks exist across the total portfolio.   

Risks identified include: direct (loss of earnings; physical asset damage and stranded asset risk); indirect (supply chain disruption; resource scarcity and specie extinctions and direct member impacts (health effects; wealth effects and loss of purchasing power). Key short term risks and key medium to long term risk were also identified. Our CCAP describes the impact of climate-related risks including: geographical/regional impacts; sector impacts; asset specific impacts of policy or technology driven changes.

A high-level framework has been adopted for assessing and managing climate change risk.  This has three key parts – information and monitoring (inputs), scenario analysis and portfolio risk assessment (output) and, finally, a response plan.  The response plan is around adaptation (weatherproofing and engagement) and mitigation (investing in renewables and related technologies and participation in the public policy debate.

Building on this the Fund has recently approved an updated Climate Change Portfolio Transition Plan (CCPTP).  This CCPTP sets out how the fund will transition its portfolio to manage climate change risk. 

Key initiatives include:

1. Advocate for an economy-wide emissions reduction target and implement sector by sector portfolio targets

2. Investigate strategies to lower carbon intensity of listed equity portfolios and SRI product offerings

3. Measure carbon intensity of Real Asset Investments and investigate strategies to lower intensity of the portfolio

4. Expand and diversify investment in traditional and emerging renewable energy technologies, clean tech, energy efficiency and other low carbon and carbon-lowering investments, including exploration of a green / low carbon bond investment strategy

5. Devise and implement a process to incorporate cost of carbon scenario analysis into investment due diligence and asset analysis for internal purposes.    

ESG risk (which includes climate change) is also part of the Fund’s overall risk management framework which has identified specific Investment related risks. Key risk indicators and mitigants have been identified and we report against those metrics quarterly as part of our Fund wide risk management framework.

 

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

First State Super is part of the Climate Action 100+ initiative and is the lead investor for three ASX listed companies.  One of the key outcomes of the collaborative initiative is to encourage companies to report under the TCFD's.

Our external ESG provider, ACSI, uses company engagement and proxy voting advice for ASX-listed companies as tools for managing climate change risks and opportunities.

ACSI has been engaging with ASX companies for years on the disclosure and integration of climate-related risks and opportunities. ACSI engages with a broad range of companies on climate risk and also prioritises particular companies given their materiality and exposure. For 2019, there were 20 companies which ACSI focused on TCFD adoption as a primary concern.

ACSI is also actively supporting members’ efforts in the Climate Action 100+ initiative, directly engaging companies alongside members who are lead investors and providing other insights like briefing members on discussions to date.

ACSI also uses proxy voting advice as a mechanism to create engagement on climate-related resolutions and as a tool for signalling where improvement on climate-related issues can be made.

Hermes Eos are also part of the initiative as well as undertaking their own engagement activities with companies where they encourage companies to report under the TCFDs.

Our internal engagement program also focusses on encouraging companies to report under the TCFDs.

To date we have seen a number of companies commit to using the TCFD framework and provide their reports publicly.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

1 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

Asset class invested

1 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our listed equities portfolio contains companies that derive a majority of their revenue from energy efficiency and related technologies.

Our Socially Responsible Equities and Diversified SRI investment options contain investments in equities; infrastructure; property and fixed income that are positively selected for clean technology, green buildings and those which demonstrate the most socially and environmentally sustainable performance outcomes in sectors such as education and training, health care, renewable energy, waste management and transport.

Asset class invested

1 Percentage of AUM (+/-5%) per asset class invested in the area
8 Percentage of AUM (+/-5%) per asset class invested in the area
50 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our infrastructure portfolio and our Impact portfolio contain investments in renewable energy including wind; solar and hydro in Australia, the US, Brazil, South East Asia and Europe.

Asset class invested

40 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our Socially Responsible Equities and Diversified SRI investment options contain investments in equities; infrastructure; property and fixed income that are positively selected for clean technology, green buildings and those which demonstrate the most socially and environmentally sustainable performance outcomes in sectors such as education and training, health care, renewable energy, waste management and transport. 

Our Property manager, Lend Lease, invests in buildings that meet green sustainability criteria.

Asset class invested

2 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

First State Super has invested in almond farms and water rights.

Asset class invested

5 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

First State Super has launched a pilot in affordable housing, acquiring sites across three metropolitan Sydney suburbs.  Investments in Epping, Waterloo and Hurstville will provide supply of at least 103 units for rent to key workers at 80% of the market average rent for the area.  This has been expanded to Victoria. 

 

Asset class invested

2 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

First State Super has a specific mandate with a manger relating to Australian water entitlements.

 

 

 

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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