Asset owners in determined push for decarbonisation
As climate change and sustainable investment programs become more integrated into an institution's overall asset allocation, there has been increasing pressure to show that these programs are actually working.
"The quickest way to shut down a board discussion about sustainability is to show poor performance," said Joey Alcock, principal consultant and chair of the responsible investment group at Frontier Advisors in Melbourne.
This increased focus on climate and sustainability reflects a trend for asset owners to use their shareholder power to push for faster decarbonisation, at least partly to counter suggestions there is still too much greenwashing happening.
Frontier has four shareholders: AustralianSuper, Cbus, HESTA and FIRST Super.
DIRECT ENGAGEMENT
Norges Bank Investment Management (NBIM), one of Europe's most active and influential asset owners, has stated it will be putting greater pressure on companies to deliver on their ESG commitments, voting against companies that fail to set a net zero emissions target, overpay top executives, or fall behind on board diversity.
Alcock said this more aggressive stance is occurring in Australia as well, for the same reasons.
“We have seen it mostly with the larger asset owners, who have a bit more direct engagement with corporates. But the smaller asset owners are increasingly flexing their muscles and considering how they can drive corporate actions,” he told AsianInvestor.
The most high-profile example of this was the shareholder revolt in 2022 against the former management of AGL, Australia’s biggest producer of Scope 1 greenhouse gases.
Entrepreneur and climate activist Mike Cannon-Brookes harnessed AGL investors' concerns about the management's lack of vision on clean energy, forcing AGL to abandon a plan to spin-off its coal-fired plants — a plan that would have allowed it to run the plants for another 20 years. The shareholders also forced the resignation of AGL's chairman, CEO, and other top execs.
Alcock said the AGL case showed institutional investors that shareholder activism could have a meaningful impact on decarbonisation. "It’s difficult to shy away when you’re the country’s largest emitter," he said.
“There’s been a growing recognition at the corporate level, but also at the investor level, that it doesn’t necessarily have to be a combative situation. Asset owners are not content to be passive, but are willing to be cooperative and above all provide sticky long-term capital.”
DATA FOR ALL
A good example of this proactive approach is the Hesta Sustainable Capital Investment Trust, which makes direct investments in lower-mid-market private equity businesses that align themselves with the UN's Sustainable Development Goals.
In January, Hesta committed a further $200 million to its sustainability-focused private equity investment program, bringing the total size of the program to $450 million.
On a related note, as reported, New Zealand Super is gearing up its sustainability strategy with a focus on renewable generation, decarbonisation, and climate-transforming industries. It is already actively collaborating with climate-tech specialists and is also looking closely at the potential of hydrogen as an alternative fuel.
As part of the Net Zero Consultants Initiative, alongside other consultancy firms such as Jana; WTW; and Lane Clark & Peacock, Frontier is partnering with MSCI to allow smaller and medium-sized asset owners access to credible carbon emissions data.
"This will allow them to analyse their equities portfolio, but also to set baselines for decarbonisation," said Alcock.
He is particularly encouraged by the range of new sustainability investment products coming to market, though he adds, "Not all of them have the capability or the level of skill that we would typically require."
Solutions ranging from geothermal energy to carbon capture and storage have drawn huge amounts of funding and, if deployed widely, could advance decarbonisation pathways.
"People talk about renewable energy, but it doesn’t stop there. As well as solar and wind, you've got the transmission element and the storage. There are many ways to commit steady supportive capital to other industries — agriculture and transport, for example — that will help companies to make their businesses more energy efficient."