Australian
Friday 23/1/2009 Page: 25
SUPERANNUATION funds are emerging as a crucial driver in the shift towards a carbon constrained economy, according to a key report commissioned by the Australian Institute of Superannuation Trustees.
The report, Carbon Counts 2008: The Carbon Footprints of Australian Superannuation Investment Managers, was provided by Trucost, a UK-based consulting firm recognised as a leader in the analysis of the environmental performance of companies. It examines 14 of the largest superannuation funds in Australia, accounting for $31.6 billion in equity holdings, and looks at the greenhouse gas emissions associated with 100 equity portfolios that employ different investment styles.
"This will have a very significant impact on the investment strategies of super funds," says Andrew Barr, policy and research manager for the AIST. "It provides a solid base of data. For example, it shows that the average carbon intensity of 14 funds was 357 tonnes of carbon dioxide emitted per million dollars of revenue. This is actually better than the average for the ASX 200 Index, which is 370 tonnes, but obviously there is a great deal of room for improvement. The figure of 357 tonnes is 20% larger than the MSCI All World Developed Index, for example.
"There is also a lot of difference between funds, with a 36% difference between the largest and smallest carbon footprints of the 14 funds, and an eight-fold variation in efficiency between individual portfolios." Understandably, some investment categories have a smaller carbon footprint than others, with the sustainability and growth groups showing a better performance than the index. The utilities and basic resources groups recorded carbon footprints at the higher end of the scale. But Barr points to the need to properly understand the figures and the nature of superannuation investment.
"You can't conclude that a super fund should put all of its investments into a particular sector, such as financials," he says. "A fundamental aspect of super investment is the spreading of risk by diversification. Putting everything into one or two sectors is simply exchanging one risk for another, and that might be entirely the wrong strategy.
"A crucial aspect of the Carbon Counts report is that it shows that portfolios can be designed to reduce their carbon intensity by the careful selection of companies within each category. This approach rebalances holdings to overweight carbon-efficient companies and underweight carbon-intensive companies relative to a benchmark. There are carbon efficient companies in all investment categories, but investors have to be willing to get into the operational detail to locate them.
"The bottom line is that a portfolio's overall exposure to carbon liabilities can be reduced without sacrificing financial returns." Barr makes the point that the focus of carbon-related investment choices has shifted from environmental concerns to issues of commercial risk, especially with an emissions trading scheme on the horizon.
"Even if the details of the ETS are not yet clear, no company can afford to ignore the financial implications," he notes. "Forward thinking companies will seek to improve carbon performance, rather than incurring escalating costs from purchasing carbon credits. Companies with less carbon-efficient use of resources are likely to see profit margins reduced, resulting in lower company valuations. "So this is a mainstream business concern.
As a result, when super fund managers are considering the possibility of investing in a company, one thing they will look at is how the company principals look at their carbon footprint, their abatement strategy, and their processes of environmental decision-making.
They will want to know that these things are thoroughly understood and discussed at the levels of senior management and the board." In this investment environment, the reliable reporting of carbon emissions and options for abatement is crucial. According to Barr, the super fund sector sees the National Greenhouse and Energy Reporting guidelines from the Australian Greenhouse Office as a good place to start.
"It's a useful framework, but I think we will see the development of a whole new generation of reporting on carbon emissions, both from companies themselves and from independent analysts and consulting firms," he says. "And over time, the National Greenhouse and Energy Reporting guidelines will evolve and improve, as the information needs of investors become more defined.
"It means that the managers of super funds are going to have to acquire a new set of skills, in addition to financial analysis. I expect that trustees will increasingly expect asset managers to identify portfolio holdings with the greatest financial risk from carbon costs. They will soon start to re-allocate assets to carbon efficient portfolio managers, if they haven't already. "After all, a big part of super fund investment is about the effective management of risk, and understanding the impact of emissions is a key part of that."
www.aist.asn.au
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