ANU Socially Responsible Investment policy 2017 Report

23 April 2018

Background

The Australian National University adopted a Socially Responsible Investment (SRI) Policy in July 2013, becoming at the time one of only a handful of Universities worldwide who use responsible investment to advance its objectives on social and sustainability issues.

In October 2015, ANU Council approved the appointment of an external portfolio manager for its domestic equities portfolio.  This step was undertaken to improve the management of its investments.  ANU makes no decision itself about individual stock selection.  However, the external manager is required to meet the following conditions:

  1. Exclude companies that derive more than 20 per cent of revenues from coal, gambling, tobacco or pornography.
  2. Hold a portfolio with 25% less carbon intensity than the S&P/ASX 200.
  3. Ensure that the portfolio demonstrates a 10 per cent improvement in the overall Environment, Social, Governance (ESG) rating relative to the benchmark.

These conditions were imposed on the external manager to efficiently decrease the University's investment exposure to CO2 intensive industries without increasing the University's exposure to volatility in the equities market. If this balance was not managed, it might adversely impact the University's financial stability, including its ability to meet obligations to pay superannuation liabilities.

The change to the way the University manages its domestic equities investments reflects a significant enhancement to the application of the SRI policy and puts the ANU in a leading position compared to its domestic peers.

Discussion

Australian equities

At 31 December 2017, the Australian equities portfolio amounted to $348 million or 26% of the University's Long Term Investment Pool (LTIP).  The CO2 intensity of the domestic equity portfolio was 32% lower than the S&P/ASX200 Index.  This was accomplished through investments in companies that are significantly lower carbon intensive relative to companies in the index.  The ANU Enhanced Index portfolio returned 10.57% for the year compared to the ASX 200 Index which returned 13.41% (including dividends and franking credits), resulting in an underperformance of 2.84%.  The fund manager has calculated that 1.34% of the underperformance was due to the ESG tilts and exclusions employed within the Enhanced Index strategy.

Since ANU implemented a new investment structure for domestic equities, the CO2 intensity of its domestic equities portfolio has decreased from 276 tonnes/$1m sales (in September 2015) to 213.6 tonnes/$1 m sales (in December 2017) a reduction of 23%.  This compares to 203.2 tonnes/$1m sales (in December 2016) as announced in the 2017 update on the ANU SRI policy.  This was 26.5% lower than the ASX200 Index at that time and is now 32% lower.  This change in CO2 intensity of the index reflects the change in the relative weights of the companies in the underlying ASX200 index during 2017 as the resources and energy sectors outperformed and the banking sector underperformed.

The University's domestic equities portfolio was tilted towards positively ranked ESG names and away from negatively ranked companies resulting in a total portfolio ESG exposure 10.8% higher than the index as at 31 December 2017.

Overseas equities

The table below shows the position of the University's overseas equity portfolio as at 31 December 2017.  The portfolio of $362 million (27% of the LTIP) is approximately 52% less carbon intense than the MSCI ACWI (Morgan Stanley Capital International All Country World Index).  This is an improvement from the previous year where the University's portfolio was 40% less carbon intense than the index.  The ANU Overseas Equities portfolio had an estimated return of 18.6% for 2017 compared to the MSCI ACWI return of 13.4%.

CO2 Intensity Comparison Tons of CO2 / $M Sales Portfolio Variance from Index

MSCI ACWI

211

 

ANU Overseas Equities Total

102

-52%

However, the comingled funds held within the overseas equity portfolio as at 31 December 2017 precludes the ability for ANU to exclude companies based on industries where revenue is sourced.  Therefore, during 2017 the University undertook a process to move to segregated mandates for the overseas equity portfolio.  This provides for more effective implementation of the University's SRI policy and allows for greater transparency within the University's overseas equities portfolio.

The process undertaken during 2017 included the selection of a number of complementary overseas equities managers that will all effectively integrate the University's SRI policy within their portfolio management process.  Individual Management Agreements (IMAs) to fund segregated accounts were signed with the selected overseas equities managers in January 2018.  The terms of the agreements include specific sector exclusions and comprehensive reporting requirements in line with the University's SRI policy including carbon intensity exposure.

Infrastructure investments

The University continues to evaluate its investment portfolio for carbon intensity and socially responsible investment practice while meeting its obligations to achieve a high and stable return on its investments. These efforts are a part of an overall commitment to making ANU a more sustainable university, and to contribute to the overall goal of global carbon emission reduction.

Subsequently, a review of the Infrastructure investments held in the LTIP was undertaken. At 30 June 2017, the LTIP Infrastructure Portfolio emitted 179.47 tCO2/$m invested. This was 54% less carbon intense than the S&P Global Infrastructure Index which emits 389.00 tCO2/$m invested. Although carbon intensity was not a focus when the initial infrastructure investments were made, the current carbon intensity of the portfolio places the University in an attractive position. In total, the Portfolio was responsible for the emissions of 22,728.65 tCO2 per year. To put this number into context, to sequester the carbon produced, 589,039 trees would need to be planted and grown for 10 years. The breakdown of carbon emissions across holdings in the Infrastructure Portfolio can be seen in the table below. 

 

Security name

Market value

Portfolio composition

tCO2e/$m invested

tCO2e financed

Total

ANU Infrastructure Portfolio

$126,643,690

100.00%

179.47

22,728.65

Listed­: direct

APA, SYD, TCL and QUB

$27,176,633

21.46%

27.61

750.31

Listed: indirect

Magellan Infrastructure Fund

$36,099,212

28.50%

98.87

3,569.02

Unlisted: indirect

ICG Energy Infrastructure Trust

$35,229,438

27.82%

475.36

16,746.58

IFM Australian Infrastructure Fund

$28,138,408

22.22%

58.09

1,662.73

Benchmarks

ASX100

 

 

150.00

 

MSCI World

 

 

138.10

 

S&P Global Infrastructure

 

 

389.00

 

LTIP Infrastructure Portfolio Carbon Emissions. Source: Investment Office Intern - Sorin Zota

tCO2e Financed

The main contributors of CO2 emissions came from a small number of assets. The graph to the right demonstrates that the top eight emitters of CO2, were responsible 85% of emissions. These assets comprise only 12.6% of the total portfolio. The Kwinana Power Station alone (2.68% of the total portfolio) was responsible for 56.4% of the Infrastructure Portfolio’s emissions.

tCO2e Financed

The Portfolio’s carbon intensive assets mainly reside within the ICG Energy Infrastructure Trust. The pie chart below illustrates that the ICG Trust was responsible for 74% of the Portfolio’s total emissions. The Trust is also comprised of 44% renewable assets, holding a number of wind farms which make up 12.2% of the total Infrastructure Portfolio.

Transitioning to a low carbon economy will require a significant transformation of the electricity sector. Renewable energy sources will have a key role in moving Australia to the clean economy of the future. The mixture of green and carbon intensive holdings demonstrates the progression the LTIP Infrastructure Portfolio has begun towards more sustainable assets.

European loans

In 2017, the Finance Committee approved an AUD 100 million asset allocation commitment to Alternative Debt investments with European private loan managers. BlueBay Senior Loan Fund 1 (AUD 50m) and EQT Mid-Market Credit Fund II (AUD $50m) were chosen. As part of the Due Diligence process, side letters to the underlying partnership agreements were negotiated to incorporate the University’s current SRI policy to ensure the following:

  • That no investment will be undertaken in a company that derives in excess of 20% of its revenue from the prohibited industries of Coal, Gambling, Tobacco and Pornography;
  • That each side letter references the ANU SRI Policy while noting that the policy may be subject to revision and amendment in the future;
  • That each manager receive a copy of the current SRI Policy of the University;
  • That a procedure is established for dealing with situations where the ANU believes that a breach of this policy has occurred including appropriate remedies.

Next steps

ESG performance snapshot: mandate managers

Looking for ways to improve the implementation of our SRI policy and to ensure adherence to the University’s SRI policy, monthly mandate compliance will be supported by annual ESG due diligence reviews. A snapshot of the results for the preliminary annual review conducted for 2017 is shown to the left.

Scoring model for the heat map.

The annual ESG Due Diligence questionnaire is designed to assess an asset manager’s performance on ESG issues and gain greater transparency to their overall ESG process. These tools assist the Investment Office in assessing the ESG activities of the asset managers. The scoring model for the ‘heat map’ is shown to the left.

For future investment mandates, the SRI policy will be considered and whenever possible, implemented. For existing asset managers, reporting on SRI will become more formalised. ESG Mandate Compliance, Proxy Voting records and ESG Impact for each portfolio will be reported on.

Conclusion

The University seeks to balance a strong commitment to socially responsible investment with a fiduciary responsibility to meet its obligations in respect of both superannuation liabilities and endowments. We will continue to look at methods available to simultaneously meet our obligations of achieving a high and stable return on the investment portfolio and decreasing the CO2 intensity. We are committed to improving the implementation of our SRI policy, and to remain a leader nationally and internationally in working pro-actively towards creating a greenhouse gas neutral future.