Brighter Super, the $31 billion Australian superannuation fund managing the retirement savings of 250,000 members, is planning to implement a carbon reduction overlay process for reducing the footprint of its passive international and domestic equity mandates within six months.
Fiona Mann, head of listed equities and ESG at Brighter Super told AsianInvestor that the fund was close to completing a pilot project for the change - the culmination of a process begun with an enhanced index manager in the Australian equities porfolio of Energy Super, before the July 2021 merger with LGIAsuper, that formed Brighter Super.
“For two years, we have applied carbon data to put an overlay on the portfolio,” she said. “The objective is to keep the returns and maintain a low level of risk, while at the same time doing what we can to clean up the footprint.”
“We want to make sure all our passive portfolios are as low on the emissions scale and as carbon friendly as we can and we are pretty far down the track to [achieving] that. Six months from now, I am hoping we will be employing this overlay on our passive equities portfolios for Australian equities and the majority of our international index investing.”
Mann said that several years ago the fund partnered with a specialist carbon solutions company, Emmi, to provide the carbon data for the overlay, alongside emissions data collected from other mainstream index providers.
However, the project is less advanced in the fund’s fixed income portfolio. “That will come later; we’re not sure exactly how we do it and are currently collecting emissions profile data in other asset classes to assist us across all managers,” Mann said.
OPPOSITION TO EXCLUSION
Mann emphasised that the screening approach was different from blanket exclusions and reiterated the fund’s position in its main portfolios not to use negative screening, except in the case of cluster munitions. “The approach stems from acting in members' best financial interests and a commitment to responsible ownership not divestment,” she said.
“In addition, we have an Energy Super heritage,” she said, referring to Energy Super, Queensland's industry superannuation fund for energy and electricity workers (following the merger with LGIAsuper, the merged fund later acquired Suncorp’s superannuation business). “So, for example; excluding the energy sector would not be in members best interests,” she said.
“You need to balance member’s financial interests with the sustainable element and be considered in the way you implement strategies: we do not see the value from a return or portfolio construction perspective in excluding big chunks of the market in this way,” she said.
Pressure is increasing on investors to enhance their passive investment exposure to ensure it delivers their ESG objectives.
In January, Hans Op’t Veld, principal director for responsible investments at PGGM, the €228 billion ($248 billion) Dutch pension fund, and chair of the markets and members committee of the Sustainable Development Investment Asset Owner Platform (SDI AOP), the world’s largest investor-led sustainable investment platform, told AsianInvestor that investment strategies based purely on market cap indices were inadequate.
“A simple market cap approach is insufficient. Asset owners understand they must go beyond just accepting the market cap as being the reality of things,” he said at the time.
NZ SUPER LEADS
Last year, the New Zealand Superannuation Fund (NZ Super) shifted the universe from which it selects $25 billion of passive investments in global equities to two MSCI market indices aligned to the 2015 Paris climate targets. The move was an effort to improve the environmental, social and governance (ESG) profile of its portfolio.
In October, NZ Super’s CIO Stephen Gilmore told AsianInvestor that there were additional benefits to shifting passive investments to ESG-tilted indices, including a substantial reduction in the amount of time that staff would have to spend on researching stocks for their ESG impact, and would increase the fund’s ability to scrutinise and engage with individual companies.
In Australia, however, amending passive allocations in this way could create additional risks.
Speaking to AsianInvestor in September, Mann noted that appetite for risk at the newly merged fund had changed in the new regulatory environment. Australia’s new Your Future Your Super regulations, which came into force in November 2021, include tighter scrutiny of funds and penalties for funds that underperform their peers.
“Trustees were looking to avoid peer and benchmark risks under the Your Future Your Super regulations and equities is an easy place to do that where some sectors might be perceived to be too risky,” she said at the time.
This story has been updated with new details in para 5.