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Driving the climate conversation between investors and companies

According to the Responsible Investment Association of Australia (RIAA)1, responsible investing is reaching a tipping point, driven by rising consumer demand for responsible and ethical products that align with their values.

RIAA data shows that seven in 10 Australians would rather invest in a super fund that considers ESG issues, rather than one that only focuses on financial returns (31%). In addition, the vast majority (85%) of Australians believe super should be invested responsibly.

Investment managers have long known that there is much more to investment returns than financial reports, and that businesses cannot protect investors, or society as a whole, while ignoring environmental, social or governance (ESG) issues.

While there is a broad array of methods that responsible owners can use to assess non-financial risks, an increasingly popular approach is to use ownership to engage with companies.

Between 2014 and 2016 alone, the volume of assets managed with explicit commitments to engage or vote on ESG issues grew 41%2. This growth is expected to continue as a result of a range of factors, including mounting social pressures on companies and investors and greater corporate governance requirements globally.

How can investors engage effectively?

First State Super began its responsible ownership journey in 2008, when we became a signatory to the Principles for Responsible Investment (PRI), a set of principles designed to contribute to a more sustainable global financial system.

We later identified climate change as one of the material risks and opportunities we faced across our entire portfolio. In order to mitigate this risk - and maximise any opportunities - we determined the need to engage with other businesses and so set about building out internal resources and looking at collaborative initiatives to effect change.

We are seeing more investors than ever using their ownership rights more effectively and going public with the ESG issues that companies are addressing.

This is due in part to the broad range of global initiatives raising awareness of climate change, such as the PRI and the Task Force on Climate-Related Disclosures (TCFD).

In Australia, corporate regulator ASIC recently released updated guidance to help businesses comply with disclosure of climate-changed risks in company prospectuses and regular reporting of operations.

Looking ahead, we expect to see more investors supporting climate-related resolutions or even putting up investor-led resolutions in instances where companies are not responding to these risks in the long term.

So, while there have been some positive changes over the past few years, there are still several areas for potential improvement.

From our perspective, engagement is about understanding how businesses will transition and prepare for a low-carbon future and balance these issues against the need for a just transition to support their workforce and community during this process.

However, engagement can only be successful if investors are clear on what they are asking of companies and the sorts of disclosures or changes they are asking for; the reasons for this and the outcomes they seek. Without this clarity, engagement will not be effective and will not help to achieve our primary aim - to deliver the best possible investment returns to our members.

The impact of collective engagement

A key focus of First State Super's investment strategy is on identifying material risks to our investments. As long-term investors, we are looking forward to what might impact on returns in the future, rather than in the immediate term. Where we identify any risks, we consider how we can engage with companies to respond to these and safeguard our members' retirement savings.

We engage with companies in which we invest, directly and through the fund managers we appoint, and also exercise our voting rights at company annual general meetings (AGMs).

In recent years we have seen some very positive results following our engagement with specific companies.

For example, in February 2018, energy company Santos released its climate change resilience report following engagement from First State Super, the Australian Council of Superannuation Investors (ACSI), and the broader investor community. This was a big step forward for the organisation in the level of disclosure on climate-related risks and opportunities.

The report outlined Santos' path forward in overseeing emissions reductions and includes disclosure of short-term targets and the long-term plan to achieve net zero emissions by 2050, in line with the global goal of limiting temperature rises to below two degrees.

In its most recent full-year result, Santos published a climate change report committing to reporting under the Task Force on Climate-Related Financial Disclosures, including scenario modelling under different climate change scenarios.

The achieve lasting positive change requires a collaborative approach, which is why First State Super is part of several global engagement initiatives including Climate Action 100+ (CA 100+). CA 100+ was launched in 2017 and seeks to ensure the world's largest greenhouse gas emitting companies take critical action to align with the goals of the Paris Agreement.

The initiative, which now includes over 370 investor signatories representing more than $35 trillion in assets under management3, is one of the largest investor-driven climate initiatives to date. It is going deeper than ever before in encouraging open and honest dialogue between investors and companies, by facilitating access to all the relevant subject matter experts.

CA 100+ has established a common high-level agenda for company engagement. While investors have adopted a wide range of engagement approaches, the initiative focuses on using collective resources, asking the same questions, reporting on progress, and measuring outcomes.

What is clear is that active owners across the globe are becoming increasingly aware of the role they can play in mitigating climate change, which is a permanent risk for investors.

As stewards of our members' retirement savings, we will continue to seek ways to protect and grow the value of our members' capital in a sustainable way.

Our aim is to be a force for good in our community and make our members money work as hard for them as they do for our community.

  1. RIAA: From Value to Riches 2017
  2. UNPRI: How ESG investment creates value for investors and companies
  3. Climate Action 100+ 2019 Progress Report
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