Our sustainable investment philosophy
At UWA, we believe that responsible investment requires effective stewardship that considers environmental, social and governance (ESG) factors.
Our Investment Policy Statement highlights our commitment to:
- Integrate ESG factors through the Implemented Consultant’s* portfolio oversight on systemic risks linked to ESG, assessing Investment Managers and assigning ESG ratings and actively engaging with Investment Managers to encourage improvement.
- Exercise our ownership rights, including company engagement and share voting in a manner consistent with active ownership and stewardship of the invested assets, via the Implemented Consultant.
- Assess climate change-related risks and opportunities in our investments and to manage them accordingly with the Implemented Consultant expected to report on carbon metrics and reduction strategies, active ownership, investment in sustainability themes, and disclosure consistent with the Taskforce on Climate-related Financial Disclosures (TCFD).
- Assess and address modern slavery risk as part of the investment process via the Implemented Consultant and Investment Managers, consistent with the Modern Slavery Act 2018 requirements.
- Exclude specified investments via the Implemented Consultant, and monitor and respond to significant issues such as human rights abuses, labour rights abuses, severe environmental pollution and corrupt business practices.
*UWA’s Implemented Consultant is Mercer. Mercer provides investment services including investment research, strategic investment advice and the implementation of approved investment strategies through a select range of investment products.
At a glance*
Mercer (UWA’s Implemented Consultant) voted at 99% of Australian and global meetings
The weighted average carbon intensity for UWA’s investment portfolio is 26% below benchmark.
UWA’s investment portfolio excludes tobacco and controversial weapons.
Our investment approach
We believe a sustainable investment approach is likely to create and preserve long-term investment capital since:
- ESG factors have a material impact on long-term risk and return outcomes and should all be integrated into the investment process;
- Climate change poses a systemic risk, and investors must consider the potential financial impacts of both the associated transition to a low-carbon economy and the physical impacts of different climate outcomes; and
- Stewardship (or active ownership) supports a social obligation to be good stewards of capital and assists the realisation of long-term shareholder value.
The University’s Implemented Consultant is Mercer, who provide an outsourced arrangement for the design and implementation of our investment portfolio. We have leveraged Mercer’s established Beliefs Policy, and Process governance framework, with portfolio implementation adopting a four-pillar approach. Learn more about Mercer’s policies and investment approach.
Dashboard view of 31 December 2021 report (using the four-pillar approach)
Pillar 1: Integration
Take a broader view on risk / return by including environmental, social, and governance (ESG) factors in decisions
Expecting investment managers to assess potential impacts on a company’s valuation if, for example, a price is put on carbon emissions or packaging waste or the increase in employee accidents lead to a major incident or the board’s executive pay is deemed excessive.
- ESG ratings
Weighted average portfolio rating for 2021 is 1.75, outperforming the universe (benchmark) by 19%.
- Carbon footprint
The weighted average carbon intensity for the listed portfolio is 26% below benchmark.
- Climate transition
Mercer has completed climate transition analysis to assist in implementing the plan to achieve the net-zero target commitment.
- Diversity and inclusion
New gender diversity metric added, and portfolio average 29% women on boards.
Pillar 2: Active ownership
Improve prospects for companies or market environments by being active owners through voting and engagement
Expecting investment managers to engage with company management and boards to encourage value creation and raise concerns. Support or concern can also be signalled via voting on resolutions at annual general meetings. Engagement with government policymakers is also important.
Mercer has an active engagement program with portfolio companies, managers and collaborations with industry associations.
Mercer voted at 99% of Australian and global meetings.
Pillar 3: Investment
Achieve long-term growth and positive ‘impact’ outcomes by allocating to sustainability solutions
Investing in those companies that are delivering the solutions to social and environmental challenges to generate returns and potentially explicitly target a particular positive social or environmental impact that can be measured and reported on.
- UN Sustainable Development Goals (SDGs) alignment
5.3% of UWA’s equity portfolio is aligned to one or more of the SDGs, consistent with the benchmark. This is a developing area Mercer is giving greater focus to as SDG mapping methodology evolves.
Pillar 4: Screening
Align mission or values priorities by screening portfolios for products or activities causing unacceptable harm
Not investing in companies that generate revenue from activities deemed to be ‘unethical’, such as landmines or tobacco manufacture. Some activities can be more commonly agreed as unethical than others. Some issues, like labour standards, are better to screen for and input into integration or active ownership processes, rather than divesting.
No breaches of exclusion commitments were identified (includes Tobacco & Controversial Weapons)
Companies with UN Global Compact red flag incidents were identified. All managers have been asked to report to Mercer on their engagement.
- Modern slavery
No modern slavery breaches were identified
Integration – ESG ratings progress
The Implemented Consultant’s (Mercer) ESG ratings reflect to what extent the appointed investment managers integrate ESG factors into their investment process. A 1 - 4 rating scale is applied, where 1 is the most integrated, which means a lower ESG rating is preferable. The following summary is a weighted average for the total UWA portfolio, drawing on the individual ratings for each underlying fund’s management strategy across asset classes.
- In 2021, the weighted average ESG rating of UWA’s total portfolio was 1.75, ‘outperforming’ the relevant Universe ESG rating of 2.15. The Universe is based on the aggregate ratings for all strategies in the relevant asset classes within Mercer’s Global Investment Manager Database.
In 2021, the ESG ratings for all asset classes either improved or remained the same, with the weighted average ESG rating of the total portfolio delivering a 25% improvement from the weighted average in 2020. The long-term trend is positive.
Improved Mercer ESG Rating 2019 2020 2021 Year on Year Weighted Average ESG Rating 2.6 2.3 1.7 -0.6 / .25.2%
Active ownership – Engagement
The UWA Investment Portfolio represents the aggregation of debt and equity held within a range of underlying companies.Ownership provides UWA, through its Implemented Consultant, with the scope to directly influence companies through the exercise of voting rights and/or actively engaging with senior management on strategic issues. Divestment of ownership, while an option in certain circumstances, removes the influence UWA, through its Implemented Consultant, can have with underlying companies.
Investors adopting this approach believe that by actively engaging with companies they can better influence management to deliver improved and more sustainable outcomes. Engagement can be light touch, via letters, or more active, through investors holding conversations with management and boards to set expectations on strategy and implementation.
There have been a number of changes in the past decade that have pushed investors towards an engagement model. One of the most instrumental factors was the increased focus on climate change, particularly following the UN Paris Agreement on Climate Change in 2015. The Paris Agreement’s central aim was to strengthen the global response to the threat of climate change by keeping the global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
2021 manager engagement by topic:
This climate change focus is evidenced in the Implemented Consultant’s engagement with its appointed Australian investment managers during 2021, summarised in the following table. Further detail on the Implemented Consultant’s monitoring approach and voting activity, including examples of Mercer’s direct engagement with the largest Australian companies, and links to the full proxy voting record can be found in Mercer’s Annual Sustainable Investment Report.
UWA believes climate change poses a systemic risk, with financial impacts driven by two key sources of change: Firstly, the physical damages expected from an increase in average global temperatures; and secondly the risks associated with the transition to a low-carbon economy.
Each of these changes presents both risks and opportunities to investors.
Potential financial impacts are taken into account at a diversified portfolio level, through portfolio construction within asset classes, and in the investment manager selection and monitoring processes. The approach UWA’s Implemented Consultant, Mercer, has adopted on UWA’s behalf is consistent with the framework recommended by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).
This approach is focused on the climate transition and transition capacity building. Mercer has also made a commitment to achieving net zero across all its investment platforms by 2050. As part of Mercer’s monitoring of its net zero commitment, they track carbon intensity that has occurred in the past, together with comprehensive transition metrics that look forward to where future portfolio emissions reductions can be prioritised.
Source: Mercer Investments (Australia) Limited
Climate metrics and measurement – Emissions intensity
Weighted Average Carbon Intensity (WACI) is the most widely used metric to assess carbon risk for portfolios and make comparisons across assets, and is also recommended by the TCFD. The Implemented Consultant analyses the WACI across investment portfolios and includes this metric alongside risk and return metrics within the quarterly reports provided to UWA’s Investment Committee.
WACI vs Benchmark
As at 31 December 2021, all asset classes at an aggregate level had a WACI equal or lower than the benchmark:
All underlying funds are lower than their respective benchmarks, except Australian Shares for Tax Exempt Investors, 11.5% above benchmark.
The total weighted average carbon intensity ("WACI") of UWA’s Equities investments is 115, which is 26.2% lower than the equivalent benchmark. The breakdown of this contribution is found in the chart above.
Climate metrics and measurement – Transition capacity
In addition to climate scenario modelling, Mercer’s proprietary Analytics for Climate Transition (“ACT”) tool considers 15 different metrics including transition risk, policy risk, UN Sustainable Development Goals (“SDG”) alignment and potential emissions from reserves (see figure below). This forward looking tool is used to assess holdings-level exposure on transition capacity and, importantly, stranded asset risk given the transitionary environment that is now well under way.
Source: Mercer Investments (Australia) Limited
Climate change and net zero commitments
Both UWA and its Implemented Consultant, Mercer, recognise the scientific guidance on climate change and the importance of transitioning away from fossil fuel reliance at the pace required to keep the additional average temperature rise to ‘well below 2°C’, as per the 2015 Paris Agreement. To aim for 1.5°C, the recommended scientific target, we must reach net zero carbon emissions by 2050, ideally earlier, and achieve a 45-50% reduction by 2030. That means transition action is required today to avoid delayed and disorderly transition later and the worst of the physical damage and loss impacts that come with even higher warming scenarios.
Mercer has committed to assisting UWA meet its 2040 net zero commitment. UWA’s globally invested portfolio, managed by Mercer, is currently aiming for a 2050 target. The Investment Committee will continue to work with Mercer to ensure UWA can meet its net zero target. Mercer has been a leader on climate change for investors since it’s first major paper in 2011 and its Investing in a Time of Climate Change research on climate scenario analysis for investors in 2015 and 2019. In late 2020 Mercer established an Analytics for Climate Transition tool and advice framework to help investors set net zero emissions targets for portfolios, with confidence in how investment objectives could still be met.
Mercer has documented more detail on its Investment Approach to Climate Change. This document will be updated later in 2022 with the latest scenario analysis and metrics and targets views. Integration, active ownership and investment in the solutions – all with a focus on transition in the real world, not just portfolio changes – are the priority approaches.
UWA is against slavery in all its forms and strives to respect human rights across the organisations’ activities.
The Implemented Consultant is committed to assessing and addressing modern slavery risks in its investment processes, and ensuring its appointed investment managers and investee companies do the same. The diagram below outlines the components of the Implemented Consultant’s modern slavery program and the activities that have been undertaken.
Assessing and understanding modern slavery
- Dedicated modern slavery risk assessment
- Training and education
Addressing modern slavery
- Beliefs, policy and process
- Active ownership
Monitoring, reporting and disclosure
- Annual monitoring
- Internal and external reporting
Source: Mercer Investments (Australia) Limited
- The Implemented Consultant’s approach to assessing and seeking to mitigate the risk of modern slavery within portfolios is outlined in the Investment Approach to Modern Slavery. In 2021, a total portfolio modern slavery risk assessment resulted in dedicated manager engagements by Mercer during the second half of the year where country and sector exposures indicated high potential risk. The asset class thematic risk assessment and holdings-level country and industry risk assessments identified risk hotspots in a few asset classes, such as emerging market equities and bonds.
- Some of the highest risk country and sector exposures identified in the emerging market shares portfolio included India and China.
- There were no companies that met the Controversy flag assessment for modern slavery (i.e. ‘red flags’).
Modern slavery was a key theme in Mercer’s 2021 Manager ESG Survey. Key findings from investment manager responses for Australian portfolios included:
- 66% of manager strategies have undertaken a human rights or labour practices risk assessment.
- 66% have also put policies in place and undertaken training of colleagues, and 51% have been engaging with investee companies.