Vision Super seeks to help manage the financial risk associated with climate change through a carbon budget approach.
We support carbon emission reductions to help manage the financial risk of our investment portfolio that is associated with climate change. We believe that during any 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 have to be written down.
These risks may be managed in different ways (as outlined in our Responsible Investment policy) including by placing carbon intensity limits on our direct listed equity investment portfolios as part of a carbon budget framework that monitors and aims to limit the degree of carbon related risk of our listed equities portfolio. Limits vary by sector and manager. The carbon budget approach is not applied to listed equity trust investments as we do not control the exposures within such trusts.
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 data from our ESG service provider (MSCI)).
Our listed equity carbon intensity restrictions apply to direct listed equities across our investment 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 data from our ESG service provider (MSCI)).
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’s carbon intensity. The discount level determines how much carbon each manager can allocate to each portfolio. The Australian listed equity asset class has a total discount of around 30%, while the international listed 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 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 invest 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.
Transition period for implementation of carbon budget |
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From time to time, there will be managers who do not have a carbon budget in place and it will be necessary for our investment managers to transition the portfolios they manage to the agreed carbon budget, for example where a portfolio has been transferred into the Fund as part of a merger, or where there is a change in our approach to managing carbon risk. In these circumstances, we will instruct our managers that they must comply with the carbon budget within a nominated transition period. If these circumstances apply, we will provide a notice that this is occurring on our website. |
Appendix 2 of the Responsible investment policy provides more detail on carbon budget framework.