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‘Nuance gets ignored’: why exclusion won’t help super on climate


The emissions intensity of the ASX has some investors with a home country bias looking for an exclusionary approach. But decarbonising Aussie equities isn’t as simple as ditching them.

Compared to other indices, the ASX is dirty. A large number of listed companies in pollutive industries like resources and energy means its emissions intensity is around 50 per cent higher than that of the global developed market average. And the large home country bias in super fund portfolios – usually about 35 per cent of the growth portion – means that they have “significantly more exposure to carbon risk than investors around the world.”

“Historically superannuation funds and other institutional investors have been focused on more exclusionary strategies, and while that’s very effective in terms of reducing your carbon footprint, there are some knock-on effects as a result,” said Scott Bennett, head of quantitative solutions at Northern Trust Asset Management (NTAM). “Investors expose themselves to very high levels of macro risk, like the global slowdown in growth we’ve seen so far this year because of supply chain slowdowns and other forces.  

“There’s been significant pressure on commodity and energy prices across the board. Investors who excluded, or were perhaps short those sectors, significantly underperformed over the course of the year.”

While that underperformance is unlikely to be sustained – the energy transition goes ever on – Bennett believes that funds should now be focusing on engagement with “best in class” companies and those using forward-looking carbon intensity metrics to get a better sense of their future emissions trajectory, as well as considering factors like quality alongside sustainability goals.

“Some companies are operating in industries where their business models are somewhat compromised. What we’re doing is bringing in data on whether a company, regardless of its carbon footprint, is actually in an industry that is potentially at risk of a move towards renewable energy,” Bennett said.

“The move away from internal combustion engines towards electric vehicles is going to have very large ramifications for industries like petrol station operators, or people who operate along that supply chain – that’s a business model that’s potentially susceptible to long-term structural issues as we move away from fossil fuels to renewable energy.”

The trick perhaps lies in selling this to members, who are demanding more exclusionary approaches fuelled by the emergence of newer funds promising the same. Bennett concedes that the idea of an exclusionary approach is attractive on a rhetorical level, but believes that exclusion is still a blunt instrument – and that “there’s a lot of nuance when we think about investing for sustainability that often gets ignored.”

“Where we’d move away from an exclusionary approach is in making sure that we’re actually engaging with these companies, and you get much better engagement with companies when you’re a shareholder than if you’re not.” Bennett said. “…While it’s true that some companies have historically had very high carbon footprints and fossil fuel reserves, some of them have been leading the charge in terms of developing new technologies for that sustainable future.”

Energy companies are also a smaller part of the market in 2022; while they used to represent 10 per cent of the MSCI World index, they now sit at a lowly three and a half per cent. Exxon Mobil, one of the longest running presences on the Dow with a more than 90-year tenure, was pushed off it in 2020 by Salesforce.

“Sustainability isn’t a new thing. NTAM has managed sustainable investing strategies for more than 30 years. Sustainability has been priced into markets in real-time, and has been deeply priced into markets over the last ten years,” Bennett said. “The impact of some of those exclusions now is not as material as it would’ve been ten years ago, but within that we do think there are specific pockets of opportunity that we don’t want to exclude.”

“We think it’s possible to achieve close to a 40 per cent reduction in your carbon exposure within the portfolio without materially increasing your active risk while still achieving returns well within the tolerance for a Your Future, Your Super benchmark. That’s where we’re seeing an overwhelming demand from institutional investors at the moment.”

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