ANU Socially Responsible Investment Report – 2020
Background
The Australian National University adopted a Socially Responsible Investment (SRI) Policy in July 2013. This policy contained clear 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 (noting that ANU's stock ownership in gambling, tobacco and pornography companies is currently zero)[1];
- 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 managers 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[2];
- 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[3].
In 2019, the University decided to aggregate the carbon intensity of the entire LTIP as well as 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.
In 2020, the University funded an external cash manager. The implementation of the SRI policy extended to the cash asset class alongside the calculation and reporting of its carbon intensity. Furthermore, the Investment Office in collaboration with the SRI Working Group, developed an ESG Integration Methodology which will be used in all future potential enhancements in the implementation of the SRI Policy.
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 2020, the University's Long Term Investment Pool (LTIP) amounted to $1.3 billion.
Discussion
LTIP Aggregate Carbon Intensity
| Name | % of LTIP | % of Benchmark | LTIP Intensity (tCO2e/ $m Revenue) | Benchmark Intensity (tCO2e/ $m Revenue) | Intensity Difference (tCO2e/ $m Revenue) | LTIP Intensity Contribution (tCO2e/ $m Revenue) | Benchmark Intensity Contribution (tCO2e/ $m Revenue) |
|---|---|---|---|---|---|---|---|
Domestic Equity | 30.00% | 27.00% | 138.60 | 198.50 | -59.90 | 41.58 | 53.60 |
Overseas Equity | 19.82% | 22.00% | 147.94 | 107.50 | 40.44 | 29.32 | 23.65 |
Fixed Interest | 13.59% | 14.00% | 51.44 | 117.81 | -66.37 | 6.99 | 16.49 |
Infrastructure* | 11.92% | 12.82% | 546.16 | 1,156.80 | -610.64 | 65.09 | 148.24 |
Cash** | 16.61% | 7.00% | 85.38 | 117.81 | -32.43 | 14.18 | 8.25 |
Property, Other*** | 8.07% | 17.18% | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
ANU Aggregated Total | 100.00% | 100.00% | 157.16 | 250.23 |
*Infrastructure carbon data as at 30 June 2020, market value as at 31 December 2020. S&P Global Infrastructure Index used as benchmark for carbon intensity.
**Bloomberg AusBond 0+ Index used as proxy for Cash's benchmark carbon intensity
***Other investments with no reported carbon data
The total aggregated carbon intensity of the University's LTIP is 157.16 tonnes of CO2 emitted per million dollars (tCO2e/$m) revenue, lower than the LTIP's Composite Benchmark's carbon intensity of 250.23 tCO2e/$m revenue by 37.19%. 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.
The carbon intensity of the total aggregate composite benchmark decreased by 18.02%. This decline is attributable to the decline in the carbon intensity of the Domestic Equity benchmark and Overseas Equity benchmark by 15.85% and 32.43% respectively in 2020.
LTIP Aggregate 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 12.23% of the University's LTIP ($198million) is invested in companies that support gender equality through policy development, representation, and transparency.
LTIP Aggregate 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 $592million (46.11% of the LTIP as at 31 December 2020) of assets held in the University's LTIP are exposed to climate change risk. 63% of the exposure ($370million) is attributable to assets in the non-financial sectors and 37% ($222million) is attributable to assets in the financial sector.
Domestic Equities
At 31 December 2020, Domestic Equity amounted to 30.00% of the University's LTIP. The ANU Enhanced Index portfolio returned 4.00%, outperforming the S&P/ASX200 Accumulation Index return of 2.36% (including dividends and franking credits) by 1.64%. Since inception at 15 October 2015, the portfolio has returned 11.29% p.a. including dividends and franking credits. The benchmark including dividends and franking credits for the same period returned 11.02% p.a.
The carbon intensity of the Domestic Equity portfolio was 138.6 tCO2e/$m of revenue at 31 December 2020, which was 30.18% 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/$m revenue (in September 2015) to 138.6 tCO2e/$m revenue (in December 2020). This was an absolute reduction of 49.78%.
The carbon intensity of the Domestic Equity benchmark declined by 15.85% from December 2019 levels. The Domestic Equity portfolio's carbon intensity remained below the benchmark despite a significant reduction in the benchmark's carbon intensity.
Domestic Equity Portfolio CO2 Emissions from September 2015 to December 2020
The Domestic Equity portfolio was tilted towards positively ranked ESG names and away from negatively ranked companies during calendar year 2020. This resulted in a total portfolio ESG exposure 10% higher than the benchmark at 31 December 2020.
Through proxy voting, the University voted against management on 22 occasions on the topic of Executive Officers' Compensation. Of the total 131 votable meetings, the University voted against management during 74 meetings.
A total of 17.50% of the Domestic Equity Portfolio ($67million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University's Domestic Equity assets in the BGE Index.
Overseas Equities
At 31 December 2020, the Overseas Equity portfolio amounted to 20.37% of the University's LTIP. The Overseas Equity portfolio returned 8.09% (post-hedge) for 2020, outperforming the MSCI ACWI ex Australia return of 6.04% by 2.05%.
| Name | Market Value ($m) | Portfolio Composition | tCO2e/ $m Revenue | Portfolio Variance from Benchmark | |
|---|---|---|---|---|---|
| RBC Overseas Equities Fund | $98.12 | 38.54% | 35.00 | |
| Antipodes Overseas Equities Fund | $2.38 | 0.94% | 0.00 | |
Magellan Overseas Equities Fund | $154.12 | 60.53% | 222.13 | ||
Total | ANU Overseas Equities Portfolio | $254.62 | 100.00% | 147.94 | 38% |
Benchmark | MSCI ACWI ex Australia | 107.50 | |||
The carbon intensity of the Overseas Equity portfolio was 147.94 tCO2e/$m revenue at 31 December 2020, which was 38% higher than the MSCI ASWI ex Australia Index. The increase in carbon intensity is attributable to Magellan Overseas Equity Fund's increase in carbon intensity exacerbated by a decline in the benchmark's carbon intensity by 32.43% in 2020.
The RBC Overseas Equities Fund is the least carbon-intense portfolio in the asset class with a carbon intensity of 38.00 tCO2e/$m revenue. This is lower than the benchmark's carbon intensity of 107.50 tCO2e/$m revenue by 67%.
Magellan Overseas Equities Fund's carbon intensity increased by 34.29% from December 2019 levels. The carbon intensity of the portfolio is attributable to Xcel Energy (Utilities - United States) and WEC Energy Group (Utilities - United States), which are responsible for 92% of Magellan Overseas Equities Fund's carbon intensity.
The Investment Office took corrective measures to decrease the carbon intensity of the Overseas Equity portfolio. At 31 March 2021, the carbon intensity of the Magellan Overseas Equities Fund declined to 24.4 tCO2e/$m revenue, 77.69% lower than the benchmark's carbon intensity of 109.2 tCO2e/$m revenue. Subsequently, the carbon intensity of the aggregate ANU Overseas Equities Portfolio at 31 March 2021 was 27.38 tCO2e/$m revenue, 74.93% lower than the benchmark's carbon intensity of 109.2 tCO2e/$m revenue.
Magellan Overseas Equities demonstrated a positive tilt of 2.12% ahead of the benchmark on ESG exposure. The fund scored ahead in terms of social (+5.05%) and governance factors (+8.98%), whilst underperforming on environmental factors (-23.53%).
RBC Overseas Equities Fund's ESG factors demonstrated a positive tilt of 0.44% ahead of the benchmark. The fund scored ahead in terms of environmental factors (+1.90%) and social factors (+0.44%). Governance factors were in line with the benchmark.
Through proxy voting, the University supported proposals at the Annual General Meetings for companies to report on the management of food waste, human rights risk assessment, and gender/racial pay gap.
A total of 20.91% of the Overseas Equity Portfolio ($53million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University's Overseas Equity assets in the BGE Index.
Fixed Income
At 31 December 2020, the Fixed Income portfolio amounted to 13.59% of the University's LTIP. The portfolio returned 5.44%, outperforming the Bloomberg AusBond Composite 0+ Yr Index return of 4.48% by 0.96%.
| Name | Market Value ($m) | tCO2e/ $m Revenue | Portfolio Variance from Benchmark | |
|---|---|---|---|---|
Total | Fixed Interest | $174.62 | 51.44 | -56% |
Benchmark | Bloomberg AusBond Composite 0+ Year Index | 117.81 |
The carbon intensity of the Fixed Income portfolio was 51.44 tCO2/$m revenue at 31 December 2020, which was 56% lower than the benchmark. This was accomplished by lower than benchmark exposure to the Industrial and Utilities credit sectors and no exposure to the Energy credit sector.
A total of 1.87% of the credit exposure in the Fixed Income Portfolio ($3million) was invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University's Fixed Income assets in the BGE Index.
Cash
At 31 December 2020, 92.68% of the Cash portfolio was managed by Kapstream. The Kapstream portfolio amounted to 15.39% of the University's LTIP. The portfolio returned 1.86%, underperforming the RBA Cash Rate + 2% p.a. return of 2.16% by 0.30%.
| Name | Market Value ($m) | tCO2e/ $m Revenue | Portfolio Variance from Benchmark | |
|---|---|---|---|---|
Total | Kapstream Managed Cash | $197.75 | 85.38 | -28% |
Benchmark | Bloomberg AusBond Composite 0+ Year Index | 117.81 |
The carbon intensity of the Kapstream Managed Cash portfolio was 85.38 tCO2/$m revenue at 31 December 2020, which was 28% lower than the benchmark. The carbon intensity of the cash portfolio is compared to the carbon intensity of the Bloomberg AusBond 0+ Year index.
A total of 17.01% of the credit exposure in the Kapstream Managed Cash Portfolio ($34million) is invested in companies committed to supporting gender equality through policy development, representation, and transparency. This is measured by the inclusion of the University's Fixed Income assets in the BGE Index.
Infrastructure Investments
At 30 June 2020, the Infrastructure Portfolio amounted to 11.04% of the University's LTIP. The Infrastructure Portfolio returned -1.59% for the financial year ending 30 June 2020, underperforming the benchmark index (CPI Plus 5.5%) of 7.53% by 9.12%.
For the financial year ended 30 June 2020, the Infrastructure Portfolio's CO2 intensity was 546.16 tCO2e/$m revenue. This was 53% less carbon intense than the S&P Global Infrastructure Index intensity of 1,156.80 tCO2e/$m revenue during the same period.
| Name | Market Value ($m) | Portfolio Composition | tCO2e/ $m Revenue | tCO2e/ $m Invested | tCO2e Financed | % Change tCO2e/$m Invested (Since June 2019) | |
|---|---|---|---|---|---|---|---|
Magellan Infrastructure Fund | 85.70 | 54.47% | 358.66 | 102.65 | 8,797.18 | -39.51% | |
ICG Energy Infrastructure Fund | 39.08 | 24.84% | 1,371.29 | 429.32 | 14,749.65 | 16.73% | |
IFM Australian Infrastructure Fund | 32.56 | 20.70% | 49.40 | 23.50 | 683.69 | -3.41% | |
Total | ANU Infrastructure Portfolio | 157.35 | 100.00% | 546.16 | 167.40 | 24,230.52 | -11.93% |
Benchmark | S&P Global Infrastructure | 1,156.80 | 267.83 |
Magellan Infrastructure Fund decreased its carbon emissions by 39.51% from 30 June 2019 to 30 June 2020. The carbon intensity of the portfolio is largely attributable to investments in WEC Energy Group (Utilities - United States), Xcel Energy (Utilities - United States), and FirstEnergy Corp (Utilities - United States) which account for 66% of the portfolio's carbon intensity.
ICG Energy Infrastructure Fund remains the most carbon intense portfolio in the LTIP's infrastructure asset class. The portfolio's carbon emissions increased by 16.73% from 30 June 2019 to 30 June 2020. 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 38% of the emissions. The carbon emissions of the Kwinana Power Station declined by 9.77% from 30 June 2019 to 30 June 2020. A transition of this portfolio to a renewable energy asset portfolio is anticipated to complete in 2021.
IFM Infrastructure Fund decreased its carbon intensity by 3.41% from 30 June 2019 to 30 June 2020. 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.
tCO2 Emissions of Assets as a Percentage of Total Infrastructure Portfolio Emissions
Carbon emissions data used are for the financial year ended 30 June 2020.
Comparison of Carbon Intensive Assets (30 June 2019 and 30 June 2020)
Carbon emissions data used are for the financial year ended 30 June 2020.
Although the ICG Energy Infrastructure Fund increased its carbon emissions by 16.73% from 30 June 2019 to 30 June 2020, the University's total year-on-year carbon emissions of the Infrastructure portfolio decreased by 11.93%. This is primarily due to the decreased exposure to ICG Energy Infrastructure Trust, the most carbon-intense portfolio, due to capital market movements from 29.01% of the Infrastructure portfolio at 30 June 2019 to 24.84% at 30 June 2020 and a decline in Magellan Infrastructure Fund's carbon emissions.
Breakdown of Emissions by Infrastructure Portfolio composition (30 June 2020)
Carbon emissions data used are for the financial year ended 30 June 2020.
At 30 June 2020, renewable energy sector assets comprised 38.06% of the energy sector assets. Exposure to renewable energy assets is attributable to investments in the ICG Energy Infrastructure Fund, which is comprised of 37.30% in renewable energy assets.
The University acknowledges the possibility of stranded asset risk in the LTIP. The segregation of coal into metallurgical and thermal is being considered.
European Loans
At 31 December 2020, Arcmont Senior Loan Fund (Arcmont) and Bridgepoint Direct Lending II (Bridgepoint) amounted to 5.94% of the University's LTIP. Arcmont and Bridgepoint returned 4.22% and 4.42% respectively for the year, underperforming the benchmark (CPI Plus 5.5%) return of 7.17% by 2.95% and 2.75%.
The European Loan portfolios deployed the negative screens associated with the SRI Policy. Furthermore, the portfolios demonstrated positive ESG tilts through their investments in Higher Education and Childcare, Biotechnology, Disease Detection Research and Water Waste Management.
Conclusion
At 31 December 2020, 99.26% of the LTIP was compliant to the University SRI Policy. The remaining 0.74% 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.
