April 3, 2023

Constructing a net zero investment strategy

A NAB panel explores the practical implications involved for superannuation funds in their net zero investment ambitions.

For Joey Alcock the word “journey” is one that puts shivers into those involved in responsible investing, simply because it is used so often.

But in a world of evolving transition pathways and imperfect data, it is also one investors need to embrace to achieve their net zero goals, the Frontier Advisors Principal Consultant says.

“A big part of thinking about what to do practically in your portfolio begins with acceptance that there is a journey involved,” Alcock told the recent Association of Superannuation Funds of Australia (ASFA) Conference in Brisbane.

“It’s not a plug-and-play type approach. It’s about taking the steps to set yourselves up for making this part of your ‘business as usual’ going forward, as an asset owner, as a fund.”

Alcock was speaking as part of a NAB panel looking at the practical implications of constructing a net zero investment strategy, alongside Head of Research, Responsible Investments, at Cbus Super, Allison van Lint, and NAB’s Chief Climate Officer Jacqueline Fox.

He told the audience the important first step on this journey was to achieve clarity on the reasoning and approach underlying a net zero investment policy.

“Right up front, it’s about getting consensus across the firm, across the fund, on the ‘why’ you’re doing this. Because then you can articulate it, both internally and also, importantly, externally to various stakeholders, who are increasingly asking this question.”

For instance, he says a net zero strategy is intrinsically tied to decarbonising holdings within the portfolio and funding climate transition solutions in line with the Paris Agreement’s goal to limit global warming to 1.5oC. This is fundamentally different from a goal of achieving carbon neutrality in a portfolio, which may involve divestments and offsets instead of being tied to real-world decarbonisation.

“Any fund that wants to aspire to a net zero strategy, really, you’re making a decision to join a global objective,” Alcock says. “You’re taking these steps in order to be part of this mission.”

Investing for transition

Cbus Super panellist Allison van Lint agreed net zero investing meant achieving real-world decarbonisation in an environment of data challenges where investors shouldn’t let perfection get in the way of progress.

“There’s a lot that investors can do within their current risk budgets to help direct the transition and start to really invest in that decarbonisation across the portfolio,” she says.

“Some sectors move faster than others – so buildings for example should be able to reach absolute zero before 2050. Others, especially in heavy industry, will probably be slower and still have residual emissions.

“The focus should be on ensuring the sectors you’re invested in are transitioning at the required speed and are enabling and supporting decarbonisation in other sectors where needed.”

After a wide-ranging analysis, she says Cbus had taken the view that supporting and engaging with companies in an orderly 1.5oC net zero transition was the right long-term strategy for risk mitigation and returns for members, whose ties are predominantly to building and construction. These industries have both significant exposure to physical risks from climate change over the long-term, as well as having an important role to play in the transition.

Building knowledge

On the data measurement and integrity question, providing transparency is key, she says, with a number of managers and research houses doing relevant work in the data collection and insight space. There are also multiple global standards and frameworks to draw from.

“You need to be aware that there’s not a single metric that’s going to tell you everything; they all tell you slightly different things and together they give you a picture of your carbon exposure and your movement towards net zero.

“Given the data is imperfect you need to be really clear with what you’ve been able to gather – the quality and credibility of the data, the coverage – and identify areas where you’re going to work on going forward.”

Van Lint says standards and frameworks to leverage as an asset owner include: PCAF (Partnership for Carbon Accounting Financials); GFANZ (Glasgow Financial Alliance for Net Zero); IIGCC (Institutional Investors Group on Climate Change); NZAOA (Net Zero Asset Owner Alliance); and locally, IGCC (Investor Group on Climate Change) and ACSI (Australian Council of Superannuation Investors).

The internal climate road map at Cbus includes a 1% allocation to climate investments as part of a multi-asset fund which sits outside the traditional asset classes in the wider portfolio. The aim is to give Cbus exposure to a diversity of assets and managers to help build knowledge around the transition space and increase the breadth of climate investment over time.

“Part of the solution is actually making sure that those hard-to-abate spaces develop the solutions and are able to decarbonise their operations and their processes. You really want to stay invested rather than just simply move out of those areas that are a bit hard,” van Lint says.

Helping customers

NAB’s Jacqueline Fox said as providers of finance for customers across the whole economy, the bank was clear on its purpose and role in the transition.

“We’re very conscious of the role we play, not just in our own footprint, but importantly how we help customers through the products and services that we have as a bank, and the insights we can generate to help them move forward in their transition,” Fox says.

She says at a practical level, signing on to the Net Zero Banking Alliance (NZBA) in 2021 has helped NAB in taking steps to build knowledge and capability of its colleagues, and awareness of particular issues to support customers in their transitions.

The NZBA is an industry-led and United Nations-convened project which brings together a global group of banks committed to alignment of their lending and investment portfolios with net-zero emissions by 2050.

NAB has set interim 2030 targets to reduce financed emissions from four of the most emissions-intensive sectors across its lending portfolio – power generation, thermal coal, oil and gas, and cement – with an ambition to align its financed emissions with pathways to net zero by 2050. Targets for a number of other carbon-intensive sectors will be set by May 2024.

As set out in NAB’s 2022 Climate Report[i], progress across 2022 shows renewables now represent 73% of the bank’s total lending to energy generation globally, with NAB providing $70.8 billion in environmental financing since 1 October 2015.

Fox also highlighted products being designed to support the transition, including NAB’s Green Equipment Finance Loan, along with NAB’s Agri Green Loan which has been designed to support its agribusiness customers investing in eligible on-farm practices and projects that deliver specific environmentally sustainable outcomes. These include reducing greenhouse gas emissions or adapting to help build resilience against climate-related risk. The bank has also arranged multiple green, sustainable and sustainability-linked loans and bonds across the breadth of capital markets for its corporate and institutional customers.

The panel at the ASFA Conference was hosted by NAB’s Head of FX Investor Sales, Global Markets, Jamie Bonic who noted during 2022 sustainable debt issuance was around $US1.5 trillion according to Bloomberg data.

“There’s a lot more liquidity than people may have thought in this space and a lot more product available for you,” Bonic told the audience.

In other superannuation work, NAB FX Strategy has recently undertaken an in-depth analysis of a large sample of the portfolio holdings data from Australia’s largest super funds made available following recent regulatory changes to the industry.

The study aims to give superannuation fund investment teams, trustees and ultimately members, greater insights into the breadth of investment strategies, country exposures and derivatives hedging being used to protect returns in volatile markets.

Request a copy of the full survey findings


[i] 2022 Climate Report (nab.com.au)




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