Against a rising tide
The scale of Australia’s infrastructure task means investors in the sector are instrumental in driving climate change outcomes. They also recognise that climate-risk assessment is a financial consideration and, therefore, they have a fiduciary obligation in the environmental, social and governance (ESG) arena. If they ignore this, they risk failing to deliver long-term, sustainable returns.
Chris Rich Staff Writer KANGANEWS
Australia’s infrastructure sector accounts for almost half the nation’s greenhouse-gas emissions, states the Clean Energy Finance Corporation’s Investing in Australia’s Infrastructure Sector report published in May 2018.
Infrastructure fund managers can play a key role in driving change, particularly on climate risk, because they are dealing with long-life assets. As Nicole Bradford, portfolio head, responsible investment at Cbus Super (Cbus) in Sydney, says: “We believe the built environment – including infrastructure – is an enabler of the transition to a lower-carbon world.”
Those at the forefront of ESG recognise that focusing on climate risk and other environmental and social issues is not only a fiduciary duty but also the only way to ensure long-term, sustainable returns – particularly given the lasting nature of assets in which they invest.
Bradford says Cbus has an overarching expectation that all managers consider climate-change risk as part of their investment processes. This is particularly important given the youth of Cbus members. “The average age of a Cbus member is currently 39. This means many of our members will be looking to draw an income from their retirement savings after 2050 – when based on current projections the physical risks of climate change will have intensified.”
Leisel Moorhead, Brisbane-based partner and ESG champion at QIC Global Infrastructure (QIC GI), adds that managing ESG risk goes hand-in-hand with delivering financial outcomes for clients. “We think infrastructure asset owners have a role to play in delivering a sustainable economy because it is a necessary part of how we deliver long-term, sustainable returns.”
Chris Newton, Melbourne-based executive director, responsible investment, at IFM Investors (IFM), agrees. “If we don’t manage ESG issues, and climate-related risk specifically, we will not generate long-term returns for our investors. It is opportunity-seeking but ultimately, if we don’t do it, our assets will be at risk from a systemic perspective, especially when it comes to climate change.”
ESG overlay on portfolios
In response to the challenge of addressing climate-change risks, some large infrastructure investors are implementing portfolio-wide approaches to manage their exposure to threatened assets better.
IFM launched the Australian Infrastructure Carbon Reduction Initiative in August 2019, which aims to reduce its emissions by more than 200,000 tonnes of CO2 equivalent annually by 2030 across its Australian infrastructure portfolio. The assets in the initiative account for about 90 per cent of the value of the fund’s Australian assets. In 2020, IFM will also start work on emissions-reduction targets in its global infrastructure portfolio.
Newton says a guiding principle for setting this target is IFM’s responsibility to minimise its own impact on the environment and climate change. “The overlay was doing our bit to meet the Paris Agreement,” he explains. “But we then considered what is possible at an asset level that still makes a return – we weren’t going to push an option that would be detrimental to our investors.”
Cbus released a climate-change position statement in August 2016, followed by the development of a climate-change roadmap to 2020. This identifies the key actions and targets Cbus will implement to move its portfolio in line with the Paris Agreement.
In September 2018, the super fund announced a commitment to net-zero carbon emissions in its property portfolio by 2030. It followed three months later with an announcement that it will be working with its infrastructure managers on their commitments to net-zero targets. During 2019, Cbus worked on assessing climate data for its global quantitative equity portfolio. As a result of these actions, Bradford says, about 25 per cent of the Cbus portfolio is headed toward alignment with the Paris Agreement.
In addition to these commitments, Cbus’s investment committee has approved an allocation equivalent to 1 per cent of its default option’s funds under management to invest in climate-related opportunities.
The QIC GI fund does not have a target for overall emissions reduction, but this is something the firm is working toward. “We are at the beginning of this journey for our fund as a whole,” Moorhead tells KangaNews. “We have carbon-footprinted the entire portfolio for the second year in a row. We haven’t yet established or calibrated a specific target. But, by doing this work, we are identifying what we may be able to achieve.”
Meanwhile, over the last five years QIC GI has been developing and implementing a process to understand and respond to the impact of climate change on its assets. Moorhead says because infrastructure has a particular exposure to the physical risks of climate change, the fund manager started by developing a framework at portfolio level to assess which of these assets are exposed and why.
As Moorhead explains: “There is no one-size-fits-all to climate risk. You have to understand the nature and particular vulnerability of an asset given its location, age and other factors. We did this on a matrix that looked at criticality and vulnerability so we could assess how each of the assets within the portfolio sits on the matrix to help us identify and understand the nature of risks across the portfolio.”
Unfortunately, the lack of policy from the federal government around carbon emissions and the environment more generally makes it more difficult for infrastructure investors to make these assessments of environmental risk.
But given the long-term nature of their assets, infrastructure investors are not waiting for government direction. As Bradford says: “We are operating in an environment where ESG isn’t radical anymore – it’s mainstream and a lot is being done by industry groups and companies independent of legislation. Australian financial regulators continue to speak to the importance of responsible investment being a fiduciary responsibility. We see a future with increasing regulatory scrutiny of how we incorporate risks and opportunities when setting investment strategy as responsible investors, especially around climate change.”
One of the tools that helps investors measure climate risk is disclosure. Bradford adds: “We’re seeing more companies heading down the road of comprehensive disclosure. The ASX [Australian Securities Exchange] requires continuous disclosure and is encouraging companies with material climate-risk exposure to report against TCFD [Task Force on Climate-related Financial Disclosures] guidelines. This helps investors such as Cbus assess risk, including understanding how companies are managing the transition to net-zero carbon.”
Climate change presents a physical, as well as a financial risk to many pieces of critical infrastructure. Investors need to be able to measure these risks to make capital-allocation decisions. This can be difficult, considering the sometimes-distant horizon of climate predictions.
One example of the extended time frames that investors need to take into account for climate impact is the projections on rising sea levels.
The Special Report on the Ocean and Cryosphere in a Changing Climate, released in September 2019 by the Intergovernmental Panel on Climate Change, states that even with immediate cuts to carbon emissions, extreme sea-level events that are historically rare – once a century – are projected to occur frequently, and once a year at many locations around the globe, by 2050.
For infrastructure investors to gauge the risks they face from climate change, and work to make a difference, they need to fully understand both the physical and financial risks of each individual asset.
One challenge here is the lack of homogeneity in the infrastructure sector. As Moorhead says: “Every asset is at a different level of maturity and faces a different issue. You have to identify what the issues are and prioritise accordingly.”
Newton agrees.“Once we set the overall objective for the Australian Infrastructure Carbon Reduction Initiative, so we had baselines of emissions profiles, we then started to look at how to reduce our emissions on an asset-by-asset level,” he says. “Each of the assets in the portfolio has a sector-specific or asset-specific target.”
As a result, IFM has worked with many of its Australian critical infrastructure assets to address emissions intensity. Companies such as Ausgrid, Southern Cross Station, Port of Brisbane and NSW Ports now have emission-reduction targets through to 2030 and beyond. Ausgrid, the largest emitter among the initiative’s assets – more than 10 times the second-biggest – has a target of 17 per cent reduction by financial year 2030 based on its baseline year of 2017.
For QIC GI, working out how to mitigate climate risk at the asset level means a focus on resilience. Moorhead says: “It is about ensuring that the assets can get back up and running as soon as possible. After all, infrastructure assets are all about delivering essential services for the community.”
The baseline, Moorhead says, is to ensure infrastructure assets are starting to measure their carbon emissions. “We are engaging with all our assets to work towards a net-zero carbon target. Once this is in place we can calibrate the relevant milestones and understand how best to drive change in the business.”
To do this, QIC GI practises active asset ownership. “Our approach is to identify and understand the material issues for a particular asset. We then work with companies to understand the climate or carbon risk and identify the transition process.”
Moorhead cites the example of Port of Brisbane. “We worked with the company to revitalise its sustainability strategy and we pushed it to produce its first sustainability report using the [UN] Principles for Responsible Investment framework.”
Cbus’s property fund managers must commit to setting science-based targets for net-zero emissions by 2030. “We believe this will raise standards of the built environment,” Bradford says.
“We see this as an important reputational matter for property and it is also becoming an area of greater focus for infrastructure companies. We are working closely with all our managers to ensure they have targets in place that are realistic and achievable, while still driving change.”
Bradford identifies a significant flow-on effect from setting net-zero targets. “It will stimulate the broader climate-related investment market in green bonds, green financing and renewables,” she says.
This deepening of the sustainable-finance market brings another benefit. Matthew Zwi, Sydney-based principal at QIC GI, explains: “We have ongoing dialogue with treasurers and CFOs across our portfolio to discuss how we can incorporate sustainable-finance types of products into their capital structures because we think these can add an additional layer of incentive to meet sustainability targets.”
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