ANU Socially Responsible Investment Report – 2019

7 May 2020

BACKGROUND

The Australian National University adopted a Socially Responsible Investment (SRI) Policy in July 2013. This policy contained 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 stock selection. 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.

In 2018, ANU funded two external Alternative Investment managers to manage European Direct Loans and appointed a Fixed Income manager. The implementation of the SRI policy extended to both asset classes with the exclusions of companies who derive more than 20% of revenues from coal, gambling, tobacco or pornography.

In 2019, the University decided to aggregate the carbon intensity of the entire Long Term Investment Pool (LTIP) in addition to reporting on the carbon intensity of individual asset classes relative to the benchmark. Additionally, the University calculated the market value of LTIP assets exposed to climate change risk and the market value of investments in companies that are leaders in corporate gender equality.

The investment parameters have been imposed on all external managers in order to efficiently decrease the University's investment exposure to CO2 intensive industries without increasing the University's exposure to volatility in the capital 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.

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. The implementation of annual ESG reviews of managers ensure the external asset managers adhere to the University's SRI policy and support the monthly mandate compliance checks conducted by the custodian. The University aims to improve ESG reporting on an ongoing basis to provide greater transparency on ESG performance and the integration of ESG factors into the asset managers' investment process.

At 31 December 2019, the University's Long Term Investment Pool (LTIP) amounted to $1.5 billion.

DISCUSSION

LTIP Aggregate Carbon Intensity graphic

The total aggregated carbon intensity of the University’s LTIP is 133.60 tonnes of CO2 emitted per million dollars (tCO2e/$m) revenue, lower than the LTIP’s Composite Benchmark’s carbon intensity of 305.24 tCO2e/$m revenue by 56.23%.

The reduction in carbon intensity was accomplished through investments in companies that were significantly less carbon-intense relative to other companies in the LTIP’s Composite Benchmark.

LTIP’s ESG Tilts and Gender Equality

The Bloomberg Gender Equality Index (BGE Index) encompasses companies that are committed to gender equality. Companies are measured against Bloomberg’s Gender Reporting Framework Metrics on Female Leadership, Pay Equality, Inclusive Culture, Sexual Harassment Policies, and Pro-Women Brand. A total of 15.75% of the University’s LTIP ($238million) is invested in companies that support gender equality through policy development, representation, and transparency.

LTIP Exposure to Climate Change Risk

LTIP’s exposure to climate change risk is calculated using the Task Force on Climate-related Financial Disclosures (TCFD) methodology. The methodology measures risk as exposure to sectors that are most susceptible to climate change. These sectors include Material and Building, Energy and Utilities, Agriculture Food and Forestry, Transportation, and Financials.  

A total of $641 million (42.41% of the LTIP as at 31 December 2019) of assets held in the University’s LTIP are exposed to climate change risk. 66% of the exposure ($426million) is attributable to assets in the non-financial sectors and 34% ($216million) is attributable to assets in the financial sector.

Domestic Equities

At 31 December 2019, Domestic Equity amounted to 27.59% of the University’s LTIP. The ANU Enhanced Index portfolio returned 25.82%, outperforming the S&P/ASX200 Index return of 25.37% (including dividends and franking credits) by 0.45%. Since inception at 15 October 2015, the portfolio has returned 12.26% p.a. including dividends and franking credits. The benchmark including dividends and franking credits for the same period returned 12.29% p.a.

The carbon intensity of the Domestic Equity portfolio was 158.4 tCO2e/$m of revenue at 31 December 2019, which was 32.9% lower than the S&P/ASX200 Index. Since ANU implemented a new investment structure for Domestic Equities, the carbon intensity has decreased from 276 tCO2e/$m revenue (in September 2015) to 158.4 tCO2e/$m revenue (in December 2019). This was an absolute reduction of 42.61%.

Domestic Equity Portfolio CO2 Emissions from September 2015 to December 2019 graphic

The Domestic Equity portfolio was tilted towards positively ranked ESG names and away from negatively ranked companies during calendar year 2019. This resulted in a total portfolio ESG exposure 11% higher than the benchmark at 31 December 2019.

Through proxy voting, the University voted against management on 29 occasions on the topic of Executive Officers’ Compensation. Of the total 155 votable meetings, the University voted against management during 53 meetings.

A total of 19.45% of the Domestic Equity Portfolio ($81million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University’s Domestic Equity assets in the BGE Index.

Overseas Equities

At 31 December 2019, the Overseas Equity portfolio amounted to 29.25% of the University’s LTIP. The Overseas Equity portfolio returned 24.80% (post-hedge) for 2019, underperforming the MSCI ACWI ex Australia return of 26.86% by 2.06%.

Overseas Equities graphic

The carbon intensity of the Overseas Equity portfolio was 108.88 tCO2e/$m revenue at 31 December 2019, which was 44% lower than the MSCI ASWI ex Australia Index. The RBC Overseas Equity Index is the least carbon-intense portfolio in the asset class with a carbon intensity of 51.54 tCO2e/$m revenue, lower than the benchmark’s carbon intensity of 195.30 tCO2e/$m revenue by 73.61%.

Antipodes Overseas Equities demonstrated a positive tilt of 4.97% ahead of the benchmark on ESG exposure. Antipodes’ ESG score outperformed the benchmark index on environmental (+1.76%) and social factors (+5.29%), whilst underperforming on governance factors (-0.82%).

Magellan Overseas Equities demonstrated a positive tilt of 16.65% ahead of the benchmark on ESG exposure. The fund scored ahead in terms of environmental (+18.20%) and social factors (+18.06%), whilst underperforming on governance factors (-4.25%).

RBC Overseas Equities Fund’s ESG factors underperformed the benchmark by 2.84%. The fund underperformance is largely attributable to social factors (-6.66%). Environmental (-3.20%) and governance factors (-2.11%) also lagged the benchmark. 

Through proxy voting, the University supported 4 shareholder proposals at the Annual General Meetings (AGM) for companies to report on gender pay gap. Policies to report on Sexual Harassment, Prison Labour in Supply Chain, and Management of Food Waste were also supported. In addition, the University supported a shareholder proposal for Amazon to report on Climate Change.

A total of 24.67% of the Overseas Equity Portfolio ($109million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University’s Overseas Equity assets in the BGE Index.

Fixed Income

At 31 December 2019, the Fixed Income portfolio amounted to 12.90% of the University’s LTIP. The portfolio returned 6.65%, underperforming the Bloomberg AusBond Composite 0+ Yr Index return of 7.26% by 0.61%.

Fixed income

The CO2 intensity of the Fixed Income portfolio was 21.41 tCO­2/$m revenue at 31 December 2019, which was 84% lower than the benchmark. This was accomplished by reduced exposure to the Industrial and Utilities credit sectors and no exposure to the Energy credit sector.

A total of 21.19% of the credit exposure in the Fixed Income Portfolio ($23million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University’s Fixed Income assets in the BGE Index.

Infrastructure Investments

At 30 June 2019, the Infrastructure Portfolio amounted to 9.33% of the University’s LTIP. The Infrastructure Portfolio returned 13.22% for the financial year ending 30 June 2019, outperforming the benchmark index (CPI Plus 5.5%) of 6.52% by 6.70%.

For the financial year ended 30 June 2019, the Infrastructure Portfolio’s CO2 intensity was 448.36 tCO2e/$m revenue. This was 69% less carbon intense than the S&P Global Infrastructure Index intensity of 1,457.11 tCO2e/$m revenue during the same period.

Infrastructure investments graphic

Magellan Infrastructure Fund increased its carbon emissions by 83.05% from 30 June 2018 to 30 June 2019. However, the carbon intensity of the portfolio (513.29 tCO­2/$m revenue) is lower than the benchmark’s carbon intensity of 1,457.11 tCO­2/$m revenue by 64.77%. The increase in the carbon emissions is attributable to investments in Evergy Inc (Utilities – United States), Xcel Energy (Utilities – United States), and FirstEnergy Corp (Utilities – United States) which account for 68% of the portfolio’s carbon emissions.

ICG Energy Infrastructure Fund remains the most carbon intense portfolio in the LTIP’s infrastructure asset class. However, the portfolio decreased its carbon emissions by 9.75% from 30 June 2018 to 30 June 2019. As illustrated in the graph below, Kwinana Power Station, an asset in the ICG portfolio, is the most carbon intense asset held in the Infrastructure Portfolio and accounts for 43% of the emissions. The carbon emissions of the Kwinana Power Station declined by 8% from 30 June 2018 to 30 June 2019.

IFM Infrastructure Fund decreased its carbon intensity by 6.57% from 30 June 2018 to 30 June 2019. The portfolio is the least carbon-intense in the University’s Infrastructure portfolio, contributing only 3% to the total carbon emissions of the Infrastructure portfolio.

Emissions of assets as a percentage of toal infrastructure portfolio emissions graphic

Comparison of Carbon Intensive Assets (30 June 2018 and 30 June 2019)

Carbon Emissions Financed graphic

Although the Magellan Infrastructure Fund increased its carbon emissions by 83.05% from 30 June 2018 to 30 June 2019, the overall increase in the University’s total year-on-year carbon emissions of the Infrastructure portfolio is only 3.72%. This is primarily due to the decreased exposure to ICG Energy Infrastructure Trust, the most carbon-intense portfolio, due to capital market movements from 34.90% of the Infrastructure portfolio at 30 June 2018 to 29.01% at 30 June 2019.

Breakdown of Emissions by Infrastructure Portfolio composition (30 June 2019) graphic

At 30 June 2019, renewable energy sector assets comprised 32.2% of the energy sector assets. Exposure to renewable energy assets is attributable to investments in the ICG Energy Infrastructure Fund, which is comprised of 41.2% in renewable energy assets.

European Loans

At 31 December 2019, Arcmont Senior Loan Fund (Arcmont) and EQT Mid-Market Credit Fund II (EQT) amounted to 4.70% of the University’s LTIP. Arcmont and EQT returned 1.73% and 2.68% respectively for the year, underperforming the benchmark (CPI Plus 5.5%) return of 7.26% by 5.53% and 4.58%. The underperformance is attributable to the internal rate of return not being reflected in the performance due to committed capital in the portfolio awaiting investment and the depreciation of Euros against the Australian Dollar by 1.8% in 2019.

The European Loan portfolios deployed the negative screens associated with the SRI Policy. Furthermore, the portfolios demonstrated positive ESG tilts through their investments in the Higher Education, Biotechnology, Disease Detection Research and Water Waste Management. 

CONCLUSION

At 31 December 2019, 99.47% of the LTIP was compliant to the University SRI Policy. The remaining 0.53% were investments made prior to the adoption of the SRI Policy which are currently in runoff. For future investment mandates, the SRI Policy will continue to be considered and implemented whenever possible. For existing asset managers, reporting on SRI is becoming 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 measuring the impact of the implementation. We strive to remain a leader nationally and internationally in working pro-actively as an active asset-owner, creating a greenhouse gas neutral future as well as promoting strong social and governance practices.