BRENTNALL In 2016, during the formative stages of creating TCorp’s risk-based investment model, also known as the total portfolio approach, the concept of stewarding our clients’ capital with the utmost care was already seen as a key enabler of delivering the best possible investment portfolios for our clients.

TCorp’s management and board worked together to create six a broad scope of investment process and
governance matters.

The sixth of these states that “consideration and management of ESG factors will create more sustainable portfolio outcomes”.

CHEANG We integrate ESG factors like climate change, diversity and inclusion, and the strength of institutions into our investment model and portfolios as they can have significant impacts on our investment returns. At TCorp, we think deeply about climate change and what impact it will have, not only on our investment risk and return, but also on the people of New South Wales (NSW). The recent flooding across the state is a clear example of the very real and immediate effects.

Climate change presents investment risk and also opportunity as the global economy and energy system transition from fossil fuels to clean energy and a low-carbon future. In recent years, the relationship between business and the community has shifted away from the more traditional focus on profits to shareholders to one that features a stronger emphasis on stakeholder capital.

Investors and businesses view their role as generating genuine social value, and are asking how they can create lasting value for customers, employees, the environment and communities as well as achieving profits. Ultimately, our focus is on delivering long-term risk-adjusted returns for our clients.

CHEANG We consider ourselves stewards of the assets entrusted to us by  the NSW government and this frames our ESG thinking. The money we invest is not ours; it has been entrusted to us to invest wisely and prudently in the expectation that it will generate a given return to meet the needs of the
people of NSW.

TCorp believes understanding and managing ESG issues is critical to achieving sustainable investment outcomes, and we operate under a five pillar stewardship framework: ESG integration into our investment process, active ownership – which means voting at shareholder meetings and corporate engagement – collaboration and disclosure, and transparency to clients on our activities.

CHEANG The biggest challenge is lack of data to generate analysis and drive decisions, and – where it does exist – incomparable data. When one manages portfolios as diversified as ours, there is a real asymmetry of ESG data available. 

The International Sustainability Standards Board has recently published draft guidelines that would set de facto global standards for ESG disclosure. This will go some way to solving the challenge, but not completely – it will not apply to governments or certain other assets we might invest in. 

Understanding the impact of ESG integration and gaining confidence that the way we are evaluating sustainable investment opportunities is creating financial, environmental, and social value is another challenge.

CHEANG All kinds of new business and investment models are emerging to solve some of the world’s most intractable sustainability challenges. There are opportunities now and into the future for the business and investment communities to become important players in a range of areas. These include vaccine development, sustainable infrastructure and property, and water management. And, as the
world transitions to a low carbon future, this includes transport such as electric vehicles.

There is potential to turn risk into opportunity. For example, one of the most quickly emerging risks is around biodiversity loss and natural capital – natural resources – which is closely linked to climate change.

Our economy requires natural capital to exist and to provide the goods and services that all Australians rely on. But if we don’t protect biodiversity, we won’t have that natural capital to deliver our basic needs.

Building on the learnings and experience of identifying climate change as an investment risk and opportunity, there is now a group of investors that is exploring how we could do something similar with biodiversity risk and natural capital.

We are watching this area closely and are involved in thought leadership and research with WTW’s – formerly Willis Towers Watson – Thinking Ahead Institute.

Another risk that could be turned into an opportunity, which is not new but growing quickly, is that of diversity, equity and inclusion. Data on this risk has been somewhat lacking as well as producing unclear signals.

We’re now getting better data on why more diverse and inclusive businesses perform better from an investment perspective, and that allows us to integrate these factors more consistently in how we build sustainable portfolios. When we use our active ownership skills to encourage greater diversity among executive teams and boards, we do it with the expectation the companies will perform better in the long term.

CHEANG In late March, the NSW treasurer issued TCorp with a direction to develop a strategy to divest all holdings in Russian assets. We divested all possible directly held assets, given market constraints, and wrote down the remainder to zero.

Like most major institutional investors, TCorp held a small percentage of Russian stocks and bonds as part of its emerging markets strategy. When the Ukraine invasion began, and sanctions and capital controls were introduced, these assets could not be sold nor the proceeds repatriated from Russia.

This led us to question where else this could happen and what more we can do to protect our clients’ investments from geopolitical and stranded asset risks. In response, TCorp has started to develop a country ESG risk framework.

This will allow us to assign a country ESG risk score to every nation where we might invest and then set minimum standards. We can then take a well-informed decision that a certain level of risk in a given jurisdiction would be beyond our tolerance level, and we would not invest.

The country ESG risk framework will allow us to identify where we have exposure to the highest-risk countries and monitor changes in risk on a regular basis. This will inform whether we might decrease or increase an investment or exit the country altogether. This work will position us to minimise future risk.

BRENTNALL TCorp’s ESG journey will continue for many years. We are working with NSW Treasury to evolve our model further, ensuring every part of our investment team integrates ESG into our processes and portfolios more seamlessly and effectively.

While the investment stewardship team is only four people, our clients have the full investment team building ESG-conscious portfolios.

Management of ESG risks will continue to grow in importance, to mitigate unwanted risks and to translate the desirable ones into opportunities for generating better investment returns for our clients.