We believe that during the transition to net zero carbon, there will be a large impact on exposed industries and companies, and there is a material risk that some assets will become stranded assets and the asset values will have to be written down.
This poses risks to our investment portfolio. These risks may be managed in different ways (as outlined in detail in our ESG policy) including by placing carbon intensity limits on our listed equity portfolios as part of our ‘Carbon budget framework’. Limits vary by sector and manager.
The listed equity asset classes are managed with an approach that aims to provide meaningfully less carbon-intensive exposure versus the respective benchmarks (based on ISS data on scope 1 and 2 carbon intensity levels).
Our listed equity carbon intensity restrictions are fund-wide and apply to listed equities across our options.
We have mandated our listed equity investment managers to manage their portfolios subject to an annual carbon budget which is defined with respect to carbon intensity (measured as the ratio of emissions to sales based on ISS data on scope 1 and 2 carbon intensity levels).
For each manager, the carbon budget is expressed as a meaningful discount to the carbon intensity of the manager’s benchmark. This is the maximum level of carbon intensity for the manager’s overall portfolio. This means that managers can still look for opportunities for mispriced stocks across their respective stock universe, and all stocks can compete for a place in the portfolio, but there is an additional hurdle for highly carbon intensive companies.
The budget for each manager has been customised recognising each strategy’s typical opportunity set.
Carbon intensity is a measure of emissions versus sales, which is a simple proxy of how exposed a company’s own operations are to carbon risk. We express the carbon budget for each manager as a discount to the benchmark index’s carbon intensity. The discount level determines how much carbon each manager can allocate to each portfolio. The Australian equity asset class has a total discount of around 30%, while the international equity asset class has a total discount of around 60%. The discount is higher for international equities as it is easier to construct a portfolio that has lower emissions and limited tracking error as the stock concentration is low relative to Australian equities.
It should be noted that there may be exceptions as managers can request to move to a position above the maximum allowable level of carbon intensity. Exceptions may be approved by Vision Super if a manager can make a sufficiently strong argument that its portfolio could breach its carbon budget and still be consistent with the transition to net zero. For example, if a manager wished to investment in a cement company that was a leader in a low or no emissions production technology that was likely to be important in moving to a net zero outcome.