Mercer* were appointed as the University’s Implemented Consultant in December 2016, with one of their key points of differentiation being their sustainable investment acumen. As Implemented Consultant, Mercer provides an outsourced arrangement for the design and implementation of the investment portfolio. The UWA Investment Committee has oversight of the Implemented Consultant and the UWA investment Portfolio. Elements managed by the Implemented Consultant include: Environmental, Social and Governance issues (ESG), investment manager selection, portfolio construction and tactical asset allocation (or rebalancing) decisions. Mercer believe that ESG issues can materially affect the value of investment portfolios and as a result “sustainability” is one of their five core investment beliefs. Mercer was a founding signatory to the United Nations Principles of Responsible Investment (“PRI”) in 2006.
UWA and its Implemented Consultant believe a sustainable investment approach is likely to create and preserve long-term investment capital since:
- ESG factors can have a material impact on long-term risk and return outcomes;
- Climate change poses a systemic risk, given the potential financial impacts of the associated transition to a low-carbon economy and the physical impacts of different climate outcomes; and
- Stewardship (or active ownership) supports a stakeholder expectation to be good stewards of capital and assists the realisation of long-term shareholder value.
The University’s Investment Policy Statement (IPS) sets out UWA’s overall philosophy, commitment and methodology for addressing ESG factors within the University’s Investment Portfolio. Section 13 of the IPS outlines UWA’s ESG commitments, specifically 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 39.7% 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 2022 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
- Review manager ESG ratings and promote integration with managers
- Climate scenario analysis and transition risk analysis using multiple metrics
- Diversity and modern slavery analysis
- 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.
Pillar 2: Active ownership
Help realisation of long-term value through voting and engagement.
- 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.
Mercer has an active engagement program with managers, collaborations with industry associations, and some portfolio companies directly.
Mercer’s appointed investment managers voted on Mercer’s behalf at 99% of Australian and global meetings.
Pillar 3: Investment
Explore investment opportunities linked to sustainability themes and solutions.
Support UN Sustainable Development Goals (SDGs) and measure SDG alignment for Mercer sustainable labelled funds.
- 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.
- UN Sustainable Development Goals (SDGs) alignment
Pillar 4: Screening
Screen portfolios for certain sectors, products or activities that meet Mercer Funds exclusions criteria.
Refer to Mercer Sustainable Investment Policy or the Fund PDS/Additional Information Booklet for exclusions and screening criteria applied.
No breaches of exclusion commitments were identified (Tobacco, Controversial Weapons, Russia)
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.
Integration – ESG ratings progress
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%)
2020 2021 2022 Year on Year Weighted Average ESG Rating 2.3 1.89 1.8 0.09 / 5%
- 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.
- 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).
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 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.
Top 5 ESG Topics for Engagement – Pacific
1. Climate Change
2. Labour Practices and Human Rights
3. Transparent Disclosure of Material ESG Factors
4. Aligned Remuneration and Incentives
5. Pollution, Biodiversity Loss and Natural Resource
Top 5 Engagement Strategies – Pacific
1. Goal orientated discussions and meetings with
2. Goal oriented discussions and meetings with Board
3. Collaboration with other investors
4. Communicate objectives for clear outcomes and time
5. Voting at general meetings
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
Climate metrics and measurement – Emissions intensity
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
- 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.
Portfolio vs Benchmark
Emerging Markets Equities
Total Portfolio (excl. Inflation Plus)
- 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).
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.
The below chart shows the categorisation of fund holdings by transition readiness and by weight in the portfolio.
Source: Mercer Investments (Australia) Limited
- The majority of UWA’s assessed portfolio is categorised positively for transition capacity.
- 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.
- 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.
- 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*.
The Grey The In-between The Green carbon intensity,
low transition capacity
varying carbon intensity
and transition prospects
low carbon intensity,
high transition capacity
Climate change and net zero commitments
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.
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 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
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.