Australia's seventh biggest superfund puts ESG issues at the very heart of its investment decision process. Stephanie Baxter takes a look at UniSuper's grown-up strategy
The UK often looks towards Australia's sophisticated superannuation system as an example to follow. Unlike the majority of our pension schemes, its large superfunds are ahead of the game in measuring environmental, social and governance (ESG) factors. One such fund is UniSuper, the A$54.7bn (£33.37bn) industry fund for higher education and research professionals, which is Australia's seventh biggest superfund.
Its philosophy is that ESG risks are business risks and should therefore be considered along with economic and financial risks. This ethos has been part of UniSuper's investment process for many years, partly driven by its members who are highly engaged on ESG issues and view them as very important.
Sybil Dixon, a senior investment analyst within the governance and sustainable investment team, explains the superfund's approach to ESG: "At a high level, climate change adaptation and governance are areas that are a continual focus, both for our investment analysts and our members. We need to make sure that companies have strategies in place to manage to a two degree Celsius future. Governance is a continual source of risk and opportunity, as without effective governance there are often failures in management - leading to greenwashing and poor stakeholder management."
While ESG has been a core focus at UniSuper for many years, its approach has evolved considerably. Internal management has enabled it to have greater levels of interaction with the companies that it invests in, allowing it to engage directly about ESG issues, says Dixon.
The biggest change in the past five years has been the development of portfolio analysis tools. These allow the fund to review the risks most relevant to a portfolio rather than taking a more thematic approach.
UniSuper has long considered ESG risks both in a quantitative and qualitative manner. The quantitative approach is about influencing what estimates are used in financial models for growth and costs, while qualitative is more high level such as whether the UniSuper is comfortable with the company's management.
The superfund uses a mixture of different data sources to identify ESG risks. It subscribes to the MSCI IVA ratings tool, which enables it to do portfolio and stock analysis. It also uses other information from the company, proxy adviser reports, broker research and media to inform about company behaviour.
Adding to its wider ESG toolkit, the fund recently started using an ESG risk analytics product launched last year by BNP Paribas Securities Services. The tool aims to help investors integrate ESG factors more easily into the investment decision-making process, looking at both environmental and corporate governance factors.
Talieh Williams, a manager of governance and sustainability at UniSuper, says: "At this stage it provides us with a way of identifying risks in the portfolio - and then using that information to ask targeted questions of portfolio managers. It also allows us to easily check the screens that we have in place for our sustainable options."
The fund also uses it for directly engaging with companies and managers. Williams explains: "We engage with managers to understand how they are managing their ESG risks (i.e. picking out poorly or unrated stocks and asking the manager to identify what gives them comfort that the particular company is not exposing themselves to undue investment risk). We can also use the tool to engage directly with companies. It is a useful engagement tool."
She adds: "We feel that this level of ESG integration helps us focus on quality investments, and also drive engagement moving forward. It can provide us with an opportunity to help the company improve its practices, and ultimately become a more sustainable long-term investment."
Other pension schemes considering using an ESG risk analytics product should remember that is just one tool that should be used alongside other data sources.
Dixon says all data sources have "inherent biases and methodological quirks", and goes on to say:
"Consider risk analytics as another lens by which to view your investments. At the first stage, just review a portfolio (or sector) exposures to poorly rated stocks and contentious issues. Consider what the issues are and if you are comfortable with that.
"You need to consider it with a range of other sources before determining if this information is already incorporated into the price and if it changes your view of the company."
Trump and ESG
While ESG is an increasingly important focus for pension scheme investment, the election of Donald Trump as US president has raised concerns about the future of international efforts to tackle climate change. In particular, there is potential threat to the progress made by the 2015 Paris agreement, a United Nations convention signed by 150 nations to keep global warming under two degrees Celsius.
While Dixon agrees the uncertainty around the Trump presidency is troubling for environment and climate change policy, she believes there are still many reasons to be optimistic.
"The economics of energy in the US mean that they are comfortably meeting their global obligations with respect to carbon emissions. Looking forward, coal generation that has been switched off is unlikely to be restored, as gas is more readily available and less expensive, and a large majority of remaining coal generators have been upgraded to significantly reduce pollution in the last few years in response to the Clean Air Act.
"As we've seen in Australia, policy uncertainty leads to stalling investment - so it is unlikely that there will be a flurry of new carbon intensive investment. Further, this is a global problem, and if China is standing up as a leader (due to both external and internal pressure) global momentum should continue."
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