ANU Socially Responsible Investment policy 2018 Report

25 June 2019

BACKGROUND

The Australian National University adopted a Socially Responsible Investment (SRI) Policy in July 2013. This policy contained a clear Environmental, Social and Governance (ESG) benchmarks, 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:

  • Exclude companies that derive more than 20% of revenues from coal, gambling, tobacco or pornography;
  • hold a portfolio with 25% less carbon intensity than the S&P/ASX 200; and
  • ensure that the portfolio demonstrates a 10% improvement in the overall ESG rating relative to the benchmark.

In 2017, ANU took the added step of appointing three external mangers for the University's overseas equity investments. ANU appointed Antipodes Partners, Magellan Asset Management Ltd and the Royal Bank of Canada Global Asset Management from a field of 58 managers.

Under the arrangements, ANU makes no decisions on individual stocks selections. The University however, requires the external mangers to ensure the investments meet its SRI Policy.

Investments by the external managers must:

  • Outperform the MSCI All Country World Index (ex-Australia) over a three year time horizon;
  • follow ESG-based sector exclusions, with no investment in companies which derive more than 20% of revenues from coal, gambling, tobacco or pornography;
  • demonstrate the proactive incorporation of ESG concepts that are broadly in line with UN Sustainable Development Goals; and
  • exhibit significantly lower carbon intensity than the benchmark.

These investment parameters have been imposed on the external managers of the domestic and overseas equity portfolios in order to efficiently decrease the University's investment exposure to CO2 intensive industries without increasing the University's exposure to volatility in the equities markets. 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.

In 2017, ANU appointed two external Alternative Investment managers to manage European Direct Loans. These managers were funded in 2018 and their investments have been constraint by the exclusions from the portfolios of companies who derive more than 20% of revenues from coal, gambling, tobacco or pornography.  

The implementation of annual ESG reviews of managers ensure our external asset managers adhere to the University's SRI policy and support the monthly mandate compliance checks conducted by the custodian. These reviews provide greater transparency on the asset managers' overall performance on ESG issues and the integration of ESG factors into their investment process. These tools assist the Investment Office in assessing the ESG activities of the asset managers.

The change to the way the University manages its 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.

In 2018, the University made significant progress in ensuring the carbon intensity of its investment portfolio remained well below the respective industry benchmarks, while maintaining a solid return on the investment portfolio.

At 31 December 2018, the University's Long Term Investment Pool (LTIP) amounted to $1.2 billion.

DISCUSSION

Australian Equities

At 31 December 2018, Australian equity amounted to 26.32% of the University's LTIP. The ANU Enhanced Index portfolio returned 0.53%, outperforming the S&P/ASX200 Index return of -1.43% (including dividends and franking credits) by 1.96%.

Since inception at 15 October 2015, the portfolio has returned 7.97% including dividends and franking credits. The benchmark including dividends and franking credits for the same period returned 8.24%.

The CO2 intensity of the Australian equity portfolio was 204.6 tonnes of CO2 emitted per million dollars (tCO2e/$m) of sales at 31 December 2018, which was 29% lower than the S&P/ASX200 Index. This was accomplished through investments in companies that were significantly less carbon intensive relative to other companies in the index.

Since ANU implemented a new investment structure for domestic equities, the carbon intensity has decreased from 276 tonnes/$m sales (in September 2015) to 204.6 tonnes/$m sales (in December 2018). This was an absolute reduction of 25.9%.

Australian Equity Portfolio CO2 Emissions from September 2015 to December 2018

The Australian equity portfolio was tilted towards positively ranked ESG names and away from negatively ranked companies during calendar year 2018. This resulted in a total portfolio ESG exposure 10% higher than the benchmark at 31 December 2018.

Overseas Equities

At 31 December 2018, the Overseas Equity portfolio amounted to 27.17% of the LTIP. The Overseas Equity portfolio returned 5.01% (post-hedge) for 2018, outperforming the MSCI ACWI ex Australia return of 0.66% by 4.35%.

The CO2 intensity was 48.8 tCO2e/$m sales at 31 December 2018, which was 72% lower than the benchmark. This is a substantial improvement from the previous year, which was 52% less carbon intense than the index.

Overseas Equity CO2 Intensity for the year ending 31 December 2018

  Name Market Value ($m) Portfolio Composition CO2e/ $m Portfolio Variance from Benchmark
Total ANU Overseas Equities Portfolio $333.71 100.00% 48.8  
  RBC Overseas Equities Fund $135.70 40.70% 53  
  Antipodes Overseas Equities $47.63 14.30% 77.6  
  Magellan Overseas Equities $150.38 45.10% 35.8  
           
Benchmark MSCI ACWI ex Australia     174 -72%

Antipodes Overseas Equities demonstrated a positive tilt of 12.5% ahead of the benchmark on ESG exposure. Antipodes’ ESG score outperformed the benchmark index on environmental factors (+9.2%), social factors (+14.2%) and governance factors (+10.1%).

Magellan Overseas Equities demonstrated a positive tilt of 2.8% ahead of the benchmark on ESG exposure. The fund scored ahead in terms of environmental (+15.6%) and social factors (+3.7%), whilst underperforming on governance (-1.8%).

RBC Overseas Equities Fund’s ESG factors performed in line with the benchmark. The fund scored ahead in terms of governance (+7.6%) whilst underperforming on environmental (-1.6%) and social factors (-2.2%).

Through proxy voting, the University supported 6 shareholder proposals at the Annual General Meetings (AGM) for companies to report on gender pay gap. Policies to promote gender pay equality were also supported. In addition, the University supported a shareholder proposal to establish a risk oversight committee to manage fake news and data security at the Facebook AGM.

Fixed Income

In July 2018, the University appointed Aberdeen Standard Investments for the management of its Fixed Income portfolio. The external manager is required to meet the same parameters as the overseas and domestic equity managers.

At 31 December 2018, the Fixed Income portfolio amounted to 14.9% of the LTIP. The portfolio returned 4.08%, underperforming the Bloomberg AusBond Composite 0+ Yr Index return of 4.54% by 0.46%.

The CO2 intensity of the Fixed Income portfolio was 72.9 tCO­2/$m sales at 31 December 2018, which was 26% lower than the benchmark. This was accomplished by reduced allocations to the Industrial, Utilities and Consumer Cyclical credit sectors.

Fixed Income Portfolio CO2 Intensity for the year ending 31 December 2018

  Name tCO2e/$m Sales Portfolio Variance from Index

Total

Fixed Interests and Loans

72.9

-26%

Benchmark

Bloomberg AusBond Composite 0+ Year Index

98.7

 

 

Infrastructure Investments

At 30 June 2018, the Infrastructure Portfolio amounted to 8% of the LTIP. The Infrastructure Portfolio returned 3.92% for the financial year ending 30 June 2018, outperforming the benchmark index (CPI Plus 5.5%) of 3.61% by 0.31%.

For the financial year ending 30 June 2018, the Infrastructure Portfolio’s CO2 intensity was 183.26 tCO2e/$m invested. This was 45% less carbon intense than the benchmark (S&P Global Infrastructure Index), which emitted 331.49 tCO2e/$m invested during the same period.

Infrastructure Portfolio CO2 Emissions for the financial year ending 30 June 2018

  Security Name Market Value ($) Portfolio Composition tCO2e Financed tCO2e/ $m Invested % Change tCO2e/$m Invested (Since June 2017)
Total ANU Infrastructure Portfolio $107,332,729 100.00% 19,699.10 183.26 -20%
  Magellan Infrastructure Fund $39,008,081 36.30% 3,616.05 92.7 -6%
  ICG Energy Infrastructure Trust $37,419,323 34.90% 15,249.04 407.52 -14%
  IFM Australian Infrastructure Fund $30,905,323 28.80% 805 26.04 -52%
Benchmark S&P Global Infrastructure       331.49  

Since 30 June 2017, the CO2 intensity of Infrastructure Portfolio declined 20%. The IFM Australian Infrastructure Fund (IFM) experienced a 52% reduction in CO2 intensity. The sale of Ecogen Energy, a gas-fired power station in June 2018, contributed to 97% of IFM’s reduction in CO2 intensity.

Magellan Infrastructure Fund reduced its CO2 intensity by 6% from 30 June 2017 to 30 June 2018. Xcel Energy, a natural gas energy provider, was responsible for 17.3% of Magellan’s carbon emission in 2017. The sale of this asset in 2018, reduced the overall carbon intensity for the Magellan Infrastructure Fund.  

As illustrated in the graph below, eight assets were responsible for 93.7% of CO2 emissions in 2018. ICG Energy Infrastructure Trust (ICG) held four of the eight assets (Kwinana Power Station, Neerabup Power Station, Esperance Energy Project and Newcastle Infrastructure Group) which were responsible for 77.8% CO­2 emissions of the University’s total Infrastructure Portfolio.

Since 30 June 2017, the CO2 intensity of Infrastructure Portfolio declined 20%. The IFM Australian Infrastructure Fund (IFM) experienced a 52% reduction in CO2 intensity. The sale of Ecogen Energy, a gas-fired power station in June 2018, contributed to 97% of IFM’s reduction in CO2 intensity.

Magellan Infrastructure Fund reduced its CO2 intensity by 6% from 30 June 2017 to 30 June 2018. Xcel Energy, a natural gas energy provider, was responsible for 17.3% of Magellan’s carbon emission in 2017. The sale of this asset in 2018, reduced the overall carbon intensity for the Magellan Infrastructure Fund.  

As illustrated in the graph below, eight assets were responsible for 93.7% of CO2 emissions in 2018. ICG Energy Infrastructure Trust (ICG) held four of the eight assets (Kwinana Power Station, Neerabup Power Station, Esperance Energy Project and Newcastle Infrastructure Group) which were responsible for 77.8% CO­2 emissions of the University’s total Infrastructure Portfolio.

tCO2 Emissions of Assets as a percentage of Total Infrastructure Portfolio Emissions

ICG produced the majority of emissions in the Infrastructure portfolio. As shown in the chart below, ICG’s emissions amounted to 78% of the total Infrastructure portfolio CO­2 emissions. However, ICG’s carbon intensity was reduced by 14% from 30 June 2017 to 30 June 2018. ICG’s CO2 intensive assets, Kwinana Power Station, Esperance Energy Project and Flinders Port reported lower emissions for the period. Kwinana Power Station and Esperance Energy Project’s energy generation levels were lower in 2018 compared with 2017, resulting in lower CO2 emissions. Tonnage through Flinders Port was reduced from 26.2 megatonne to 24.5 megatonne for the period. The decrease in the level activity through the port resulted in lower CO2 emissions.

Breakdown of Emissions by Infrastructure Portfolio composition (30 June 2018)

As at 30 June 2018, renewable energy sector assets comprised 21% of the energy sector assets. Through exposure to its Australian Renewable Income Fund, ICG’s overall renewable energy assets increased to 42% of the fund.

Comparison of Carbon Intensive Assets (30 June 2017 and 30 June 2018)

European Loans

At 31 December 2018, European Loans BlueBay Senior Loan Fund 1 (BlueBay) and EQT Mid-Market Credit Fund II (EQT) amounted to 5.68% of the LTIP. BlueBay returned 7.93% for the year, outperforming the benchmark (CPI Plus 5.5%) return of 7.38% by 0.55%. EQT returned 8.79% for the year, an outperformance of 1.41%.

Both portfolios deployed the negative screens associated with the SRI Policy. One potential loan investment was excluded from the European Loans portfolio of EQT as the company derived more than 20% of its revenues from gambling.

CONCLUSION

At 31 December 2018, 98% of the LTIP was compliant to the University SRI Policy. Of the remaining 2%, these were investments made prior to the adoption of the SRI Policy which are currently in run off. For future investment mandates, the SRI Policy will continue to be considered and implemented whenever possible. For existing asset managers, reporting on SRI will become more formal and robust.

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 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 as well as promoting strong governance practices.