Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
UniSuper in hot water over Santos investment
Acting on behalf of UniSuper member Rachel Davies, the Environmental Defenders Office (EDO) has written to the fund’s executives – including CEO Peter Chun and CIO John Pearce – warning that its $168.3 million investment in oil and gas company Santos “may amount to a breach of law”.
The EDO alleges that UniSuper may have breached its trustee obligations under section 52 of the SIS Act by failing to “adequately interrogate the net zero claims/emissions reduction representations” made by companies in which member funds are invested, namely Santos. UniSuper also recently voted against shareholder proposals requesting Santos disclose plans for how it will align its investments in oil and gas assets with a 2050 net zero target and Paris-aligned scenario.
Davies is also concerned that UniSuper may have breached the Corporations Act by engaging in misleading or deceptive conduct, mainly by conveying that it is “a leader on climate action”; that its investment strategy is aligned with the Paris Agreement; that it’s reducing its portfolio emissions; and that its investment strategy will help deliver long-term value for UniSuper members.
UniSuper has previously threatened to divest from companies that don’t set emissions reductions plans, including CSL, Aristocrat, and Qube. The fund’s own position paper on climate risk reads:
“As a long-term investor it is incumbent upon UniSuper to recognise the physical risks posed by climate change and the transitional risks and opportunities arising from decarbonisation. A prudent approach to portfolio management will involve the avoidance of assets that are most likely to be stranded. It will also involve being aware of the risks of owning high emitters in a world that may require a faster transition to carbon neutrality than currently forecast.”
As the EDO’s letter notes, Santos has continued to scale up its investments in oil and gas production, which the EDO says contradicts its intention to decrease greenhouse gas emissions under its climate action plan. The letter notes that Santos is “curiously absent” from the tables in UniSuper’s latest climate risk report that set out the fund’s consideration of the climate action undertaken by companies in which it invests. Davies believes UniSuper’s best course of action is to divest the holding, and has given the fund until September 16 to respond.
It’s a case not unlike that of Rest member Mark McVeigh, who took that fund to court in 2018 after alleging that it had breached the Corporations Act by not providing information related to climate change business risks or a plan to address them. He amended the case to allege that Rest failed to act in his best interests by not properly considering the financial risks of climate change. Rest and McVeigh later settled the case, with Rest agreeing that its trustees have a duty to manage the financial risks of climate change.
UniSuper declined to comment. ASIC could not be reached for comment on its view of the case.
