Case study on climate – risk management, stewardship and impact
The way we integrate climate change considerations into our investment risk management and stewardship is an example of how we work to reduce both asset level and systemic risk, capitalise on opportunities, and understand our impact.
Governance and strategy
CSC’s management of climate-related risks to the portfolio is governed by its board-approved climate risk policy. Its implementation is managed by the Chief Investment Officer and her investment team, consistent with other investment-related delegations from the Trustee board.
CSC’s approach to climate recognises actions decisively oriented to the following goals:
- Hedging customers’ portfolios against climate risks and
- Limiting atmospheric concentrations of greenhouse gases
Risk management: hedging customers’ portfolios against climate risks
We consider several types of climate change-related risks to the future value of assets and the aggregate impact of these risks to assets in the portfolios. We use scenario analysis and stress test methods recommended by peak bodies globally, including the International Panel on Climate Change Assessment Report 6 (IPCC AR6).1 These methods aim to integrate our assessment of:
- Direct risks to physical assets;
- Risks from regulatory responses to climate change;
- Risks to the competitive position of assets under different rates of decarbonisation, across jurisdictions and through time; and
- Risks from climate-related litigation.
Climate-related risks are only one of many types of portfolio risk we manage. We typically manage these risks by requiring increased returns from an asset to justify the risks. On rare occasions, we see the risks as outweighing the available returns to such an extent that we exclude these assets from the portfolio. For example, we do not own shares in companies that derive 70% or more of their revenue from thermal coal production and /or energy generation because we viewed developments in cleaner-energy competition as posing an unacceptable long-term risk to their investment returns.2
Close monitoring of climate-related risks to the portfolio not only enables us to manage these risks, but also to identify emerging investment opportunities. For example, we earned strong returns by being one of the earliest Australian superannuation funds to invest in wind farms in September 2015. Since then, we have recycled that profit into European and Australian renewable developers, helping to grow overall renewable energy capacity, which is a real-world consequence of our investment activities.
Risk management: Limiting concentration of greenhouse gasses
Climate change is also a common (systemic) risk to markets and economic systems, and contributions to limiting climate change also limit this risk to our portfolios. Because these efforts are driven by our investment risk management objectives, we are rigorous when considering what actions would be most effective (given the cost and the impact).
Our strategic approach can enable CSC to be ahead of consensus positions. For example, we were the first Australian super fund to open our portfolio to carbon footprint analysis by the Climate Institute in 2009. Consequently, we developed an early understanding of the inaccuracies and complexities that mean carbon footprints are a poor indicator of either climate risk to an investment portfolio or its contribution to climate outcomes. When portfolio decarbonisation commitments (e.g. Net Zero targets) later became popular, we could remain focussed on what leading climate specialists today promote to be more effective climate-focused activities for investors, such as:
- Providing early support to help catalyse collaborative investor initiatives that address climate:
- The Governance Advisory Service (later Regnan) which we designed and established in 2001;
- The Investor Group on Climate Change from 2007;
- The Principles for Responsible Investment – which we joined as a founding member in 2006.
- Using our engagement and voting to support company boards’:
- transparency about climate related risks (since 2003);
- attention to and control of company influence on climate policy (since 2007);
- prioritisation of director competencies relevant for companies’ climate strategy development (since 2012).
- Allocating capital to undercapitalised activities relevant to energy transition.
Metrics and Targets
CSC recognises the risks for long term investments predicted under more severe climate change scenarios and the goal of the Paris Agreement to limit carbon concentrations in the atmosphere.
CSC portfolios often exhibit low (and /or falling) carbon emissions (see CSC’s public market equities carbon footprint below), and may resemble investment products described as “Net Zero”. However, we caution that portfolio characteristics do not map to impact on carbon emissions or concentrations in the physical world. Moreover, we cannot confirm low and falling portfolio emissions will remain feasible through to 2050.
CSC’s public market equities carbon footprint at 30 June 2024
| CSC listed equities | CSC | Benchmark | Difference |
|---|---|---|---|
| Carbon footprint* | 48 | 58 | 10 (-18%) |
*Carbon footprint is measured in tonnes of CO2e (Scope 1 + Scope 2) per AUD million invested.
At present we have over A$2,326 million invested in high-quality private and public assets including wind farms, waste management infrastructure projects and renewable energy initiatives that add to the net new supply of facilities (as at 30 June 2024).
These investments reduce our portfolio carbon emissions by over 545,700 tonnes of CO2 per annum, compared to having this money invested passively to meet a similar level of energy demand (for financial year to 30 June 2024).3
1 Sixth Assessment Report — IPCC
2 We implement these decisions using MSCI’s Business Involvement Screening Research methodology. This can mean some (immaterial <0.005%) exposures are not identified, but this remains the most cost-effective way to managing these risks.
3 Estimated carbon emissions if the equivalent portfolio value was invested in the companies in the MSCI All Country World Energy Index.