Our sustainable investment philosophy

Objective:
Take a broader view on risk / return by including environmental, social, and governance (ESG) factors in decisions

Example:

• Review manager ESG ratings and promote integration with managers
• Climate scenario analysis and transition risk analysis using multiple metrics
• Diversity and modern slavery analysis

2022 highlights:

• ESG ratings
  Weighted average portfolio rating for 2022 is1.8% better vs universe (benchmark).
• Carbon footprint
  The weighted average carbon intensity (WACI) for listed equities is 3.2% above its benchmark. However total assessable portfolio WACI is 39.7% below its benchmark. 
• Climate transition
  Scenario analysis completed and climate transition capacity and net-zero progress monitoring continues. 
• Diversity and inclusion
  Diversity and inclusion, now 35% (was 29%) women are Directors on avg. on company Boards in the portfolio.

Objective:
Help realisation of long-term value through voting and engagement.

Application:

•  Work closely with appointed listed equity investment managers on voting and engagement.
• Engage with companies and policymakers either directly or via managers and/or collaboratively.

2022 highlights:

• Engagement
  Mercer has an active engagement program with managers, collaborations with industry associations, and some portfolio companies directly.
• Voting
  Mercer’s appointed investment managers voted on Mercer’s behalf at 99% of Australian and global meetings.

Objective:
Explore investment opportunities linked to sustainability themes and solutions.

Application:
Support UN Sustainable Development Goals (SDGs) and measure SDG alignment for Mercer sustainable labelled funds.

2022 highlights:

• UN Sustainable Development Goals (SDGs) alignment
  UWA’s equity portfolio is more strongly aligned to the SDGs than the benchmark, by 3.6%. This is a developing area as SDG mapping methodology evolves.

Objective:
Screen portfolios for certain sectors, products or activities that meet Mercer Funds exclusions criteria.

Application
Refer to Mercer Sustainable Investment Policy or the Fund PDS/Additional Information Booklet for exclusions and screening criteria applied.

2022 highlights:

• Exclusions
  No breaches of exclusion commitments were identified (Tobacco, Controversial Weapons, Russia)
• Screening
  Companies with UN Global Compact red flags were identified. Key managers have been asked to report on their engagement and monitor remediation progress.
• Modern slavery
  No companies with high severity Modern Slavery flags were identified.

Mercer’s ESG ratings reflect to what extent the appointed managers integrate environmental, social and governance (ESG) factors into the investment process.

• At 31 Dec 2022, the weighted average ESG rating of UWA’s total portfolio was 1.80, slightly ‘outperforming’ the relevant, composite Universe ESG rating of 1.95 by 8% (0.15).

At 31 Dec 2022, the weighted avg. total portfolio ESG rating was 1.80, meaning a slight improvement in the average rating this year, by 0.09 (5%)

Summary

• The weighted average ESG rating continues to be on-par with the relevant Universe ESG rating.
• All ESG ratings with the exception of Global Unlisted Infrastructure and Global Absolute Return Bonds have either stayed the same or improved.

Methodology

• Mercer’s ESG ratings reflect to what extent the managers integrate ESG factors into the investment process. A rating of 1 is for the strongest ESG practices and 4 is for the weakest ESG practices.
• The Universe is based on the aggregate ratings for all strategies in the relevant asset classes within Mercer’s Global Investment Manager Database (GIMD).

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 by exercising voting rights and/or actively engaging with senior management. Divestment of ownership, while an option in certain circumstances, removes the influence UWA, through its Implemented Consultant, can have with underlying companies.

UWA 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 conversations with management and Boards to set expectations on strategy and implementation.

Mercer partners with its investment managers to understand their direct engagement with companies, through an annual survey below, targeted follow up and topic-specific discussions.

Below and right are extracts from Mercer’s latest Manager Engagement Survey.

Summary

The 2022 survey had an 86% response rate in the Pacific (107 submitted responses). Some key Pacific results include:

• 36% have set climate transition targets and another 25% plan to within 1-2yrs.
• 62% consider nature/biodiversity in investment decisions.
• 75% monitor for UN Global Compact red flags, or similar

Methodology and notes

Mercer sends the online survey (with word version for internal response collation) to all appointed managers globally, to complete for each strategy. It is sent in early December for early January submission and results are compiled in Q1. Mercer’s global surveys team supports the exercise.

Results are prioritised in conjunction with portfolio analytics and targeted follow up with managers will then be undertaken throughout the year by portfolio managers and the sustainable investment team.

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 its Australian investment platform 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

Weighted Average Carbon Intensity (WACI) is the measure of the portfolio’s exposure to carbon-intensive companies.

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

Summary

• All funds are lower than their respective benchmarks except Australian Shares, which is 19.4% above benchmark.
• The weighted WACI of UWA’s Total Portfolio (excluding Inflation Plus) is 120.1, which is below the equivalent composite benchmark.
• The total portfolio breakdown is shown in the table.

 Methodology

• WACI is expressed in tons CO2e / $M revenue and is a recommended metric of the Taskforce on Climate-related Financial Disclosures (TCFD).
• The Inflation Plus Fund benchmark does not have WACI available, so the total portfolio WACI has been calculated both with and without this fund (left).

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.

The below chart shows the categorisation of fund holdings by transition readiness and by weight in the portfolio.

Source: Mercer Investments (Australia) Limited

Summary

1. The majority of UWA’s assessed portfolio is categorised positively for transition capacity.
2. Around 1.4% of companies by weight in the total portfolio are categorised has having low transition capacity (dark grey and light grey) and these companies are responsible for almost 30% of carbon intensity.
3. Mercer continues to engage with its appointed managers on transition progress with the underlying companies and participate in collaborative engagement with the top emitting companies globally.

Methodology

• Mercer’s ACT tool consolidates 15 different underlying metrics including emissions, potential emissions from reserves, transition preparedness, UN Sustainable Development Goals (“SDG”) alignment and solutions revenue.
• The unassessed portfolio component includes cash and derivatives.
• The Implemented Consultant’s approach is outlined further in its Investment Approach to Climate Change*.

Both UWA and its Implemented Consultant, Mercer, recognise the scientific guidance on climate change and the importance of keeping 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.

UWA has set a 2040 net zero emissions target across the University’s activities. 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 increasingly align the investment portfolio with UWA’s target where possible.

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 in its Investment Approach to Climate Change. This document will be updated in early 2024 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 committed to its responsibility to employees, students, suppliers and community to ensure that modern slavery risks are identified and addressed within our operational supply chains. The Implemented Consultant, is committed to assessing and seeking to address modern slavery risks in its investment processes, and asking its appointed investment managers and investee companies do the same.

Source: Mercer Investments (Australia) Limited

Summary

The asset class risk assessment and holdings-level country and industry risk assessments identified potential hotspots in emerging market equities and bonds. Some of the highest risk country exposures identified in the emerging market shares portfolio included, India and China.

Modern Slavery Incident Indicator

There were no holdings with red flag incidents in any Mercer Funds

Methodology

Mercer has an investment specific modern slavery approach, which includes an ongoing program of engagement with managers based on red flags, holding risk assessment results and manager surveys.

For more information, please see Mercer’s Investment Approach to Modern Slavery, online here.