Investment and the transition to renewable energy

Posted 27 September 2022

Occasionally, members ask about UniSaver’s approach to responsible investment, particularly in relation to climate change. This response is from the directors of the scheme’s trustee UniSaver Limited.

As directors, we share members’ concerns about the increasing impact of climate change and have moved to reduce the carbon footprint of UniSaver’s investment portfolio. First, let’s look at the steps we have taken. In 2021, we moved half of UniSaver’s global equities holdings to a sustainable global equities fund. This fund provides access to a broad range of global shares in developed and emerging markets, while reducing exposure to carbon emissions and fossil fuel reserves by at least 50% compared to its benchmark (the actual figure at the time of writing is 59%). The fund specifically excludes companies that receive greater than 10% of their revenue from activities related to thermal coal. In addition, the fund provides an increased exposure to renewable energy (currently 21% higher than the benchmark). As a result of these and other changes, the scheme’s overall equity exposure to fossil fuel companies is now less than 1%. Our investment manager Russell Investments is also making changes to the scheme’s fixed interest asset holdings, which will result in a reduction in carbon footprint, the exclusion of thermal coal, and alignment with the United Nations Global Compact [external link].

In addition to these initiatives, UniSaver’s carbon footprint will reduce across the board as a result of Russell Investment’s commitment to achieve net-zero carbon emissions for all investment portfolios by 2050. Russell Investments has joined the Net Zero Asset Managers initiative [external link] (NZAM). This is an international group of asset managers committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5°C. The NZAM initiative requires Russell Investments to set targets at 5-year intervals to help track progress. Russell Investments’ initial interim aim is to manage at least 75% of New Zealand-domiciled funds in line with net-zero and achieve a 50% reduction in carbon emissions intensity by 2030. Its climate action plan includes a phase-out of thermal coal by 2030 in OECD countries and by 2040 in the rest of the world. Russell Investments expects net-zero commitments to increase over time and that technological change, shareholder engagement, and government policies will lead to lower carbon emissions in the global economy.

We recognise that perhaps for some members these initiatives will seem rather tentative. You might argue that divestment is the fastest, most effective way to lower a portfolio’s carbon footprint. However, in our view it is unlikely to achieve the outcome of reducing real-world emissions. By divesting from a particular company’s shares, we simply make the company’s equity cheaper for other investors to hold. An alternative approach is to hold the shares but engage as a shareholder with the company to improve its behaviour. This is the approach favoured by our investment manager which views active ownership as a fundamental part of its responsible investing strategy. Active ownership is the use of shareholder rights to advocate for good corporate governance and to improve the long-term value of a company. Climate change resilience is a particular area of focus for Russell Investments’ active ownership programme, which includes actions taken in partnership with investor groups such as the Institutional Investors Group on Climate Change [external link]. It is also a signatory to Climate Action 100+ [external link], an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. Through this initiative, Russell Investments is engaging with companies on improving climate change governance, cutting emissions, and strengthening climate-related financial disclosures. A cynic might comment that these initiatives will have limited effectiveness. However, if all conscientious investors divest, these shares will end up being held by investors who are less concerned by the companies’ environmental impact, and this may lead to fewer controls on firm behaviour with greater emphasis on profitability at the expense of environmental outcomes. It's worth remembering that the fossil fuel industry and other sectors with high average carbon footprints are the most material in deciding our global decarbonisation pathway. By reallocating away from these carbon-intensive sectors, investors could potentially be hindering the global energy transition.

The risks arising from climate change are increasingly well understood. Relevant regulation, associated reporting requirements, and the approach of investment managers are moving accordingly. UniSaver is moving with these tides, guided by Russell Investments. In doing so, we are in step with, rather than leading, best practice in the investment industry. This positioning is deliberate. We are mindful that our principal duty is to advance members’ financial interests. This and other investment related  decisions must be made in light of our principal responsibility to maximise the long-term real return on members’ retirement savings while ensuring an appropriate trade-off between that return and the risk taken to earn it. Increasingly, delivering on that responsibility requires careful consideration of, and an appropriate response to, climate-related financial risk.