Carbon neutral by 2030: Member update02 May 2022 10 min read
We have entered a decisive decade for humanity, with the warnings about the impact of inaction on climate being evidenced around the world. Economic systems will face major disruption and therefore we need to make a paradigm shift in our economic models to protect our members’ retirement savings. NGS Super took the bold decision to go where no other super fund has gone, and in 2021, we announced our ambitious target to transition the portfolio to carbon neutral by 2030.
As a Fund, we recognise that this is the moment in history in which we need to take drastic action to contribute to change. By using the collective capital of committed NGS members, we will support companies building sustainable, lower carbon businesses, while aiming to improve on current average long-term investment returns for NGS members. We are delighted to announce that our work over the last 12 months has confirmed that a carbon-neutral investment portfolio by 2030 is achievable, and we have set an interim target of a 35% reduction in carbon by 2025.
This update covers the following:
What have we done since March 2021?
We have been working on 3 significant items:
- obtaining a baseline measurement of the carbon intensity of our very diverse investment portfolio
- completing scenario analysis over the listed and unlisted assets of our portfolio
- completing a glide path analysis to model carbon reduction scenarios over time, taking into consideration risk, return and tracking error.
We’ll look at each of these steps — and why they’re important — in detail below.
Baseline measurement of carbon intensity
Understanding our starting point — that is, how much carbon1 is in our portfolio right now? — allows us to quantify the actions we need to take from now until 2030 to reduce our carbon intensity figure to net zero.
Our baseline measurement of carbon intensity focused on scope 1 and scope 2 emissions of the Diversified (MySuper) investment option, in which more than 70% of the membership is invested. As the Diversified (MySuper) investment option is decarbonised, all the other NGS Super investment options will also decarbonise.
The Fund’s investment portfolio is diverse. The asset allocation for the Diversified MySuper investment option shows holdings across an array of asset classes such as equities, alternatives, fixed income, property, infrastructure and cash. Due to the diverse nature of the portfolio, the Fund engaged specialist third-party service providers to help in the carbon intensity measurement of the Diversified (MySuper) investment option.2
As at 30 June 2021, the Fund’s baseline measurement of the Diversified (MySuper) option was approximately 48 tonnes of carbon dioxide equivalents per million dollars invested (tCO2e/$ million invested).
It is important to conduct scenario analysis while transitioning to a carbon-neutral investment portfolio because it can help to:
- identify key risk within the investment portfolio, allowing us to implement an action plan through either divestment or engagement, and
- understand where opportunities lie to invest in the solutions for climate change – we want to invest in climate solutions.
We completed our scenario analysis on 6 main scenarios, looking at the results as at 2030, 2040 and 2050. For listed assets, we considered all 6 scenarios. For unlisted assets, we considered 3 scenarios (Current policies, Delayed transition and Net zero by 2050). You can find details of the 6 scenarios in the appendix at the end of this article.
It will be important for the Fund to revisit the scenario analysis as the scenario assumptions will change over time, depending on government policy implementation and enhanced technologies. This will ensure we stay abreast of the relative risks and opportunities as they change. We will outline our key findings and takeaways from the scenario analysis in our second Task Force on Climate-Related Financial Disclosure (TCFD) report later in 2022. Read our our current TCFD report
Glide path analysis
If we wanted to decarbonise the portfolio tomorrow, we could, but it would come at a significant cost (investment performance) to the retirement savings of our members. Abruptly divesting currently held high scope 1, 2 and 3 assets would bring immense volatility and tracking error to investment returns, which is not in members’ best financial interests. Also, merely divesting high scope 1, 2 and 3 companies would not reduce the Fund’s carbon emissions to zero. To become carbon neutral tomorrow, as well as abruptly divesting, we would need to purchase carbon offsets — this would not be in members’ best financial interests, as the cost of those offsets would be deducted from investment returns. For example, using carbon credit units as a proxy for carbon offset costs, as at 24 March 2022 a carbon credit unit was approximately $31.4 Applying this estimated cost to the Diversified (MySuper) investment option’s current carbon intensity, this would amount to 0.15% in additional costs, which would be deducted from investment returns.Below is a Fees and Costs5 example illustrating how the costs of purchasing carbon offsets would increase the investment costs to members:
|Fees and Costs example for a member 100% invested in Diversified (MySuper) for a 1-year period with a $50,000 account balance|
|Current Fees and Costs||If we used carbon offsets|
|Administration fees and costs||$65 p.a. plus 0.10% p.a. of the account balance,
capped at $500 = ($65 + $50) = $115
|$65 p.a. plus 0.10% p.a. of the account balance,
capped at $500 = ($65 + $50) = $115
|PLUS Investments fees and costs||0.70% = $350||0.70% = $350|
|PLUS Transaction costs||0.09% = $45||0.09% = $45|
|PLUS Estimated carbon offset costs||N/A||0.15% = $75|
As you can see, simply using carbon offsets to become carbon neutral increases costs to the membership - thus the importance of the glide path analysis. We needed to model various decarbonisation scenarios across multiple time frames to understand the rate at which we could divest the desired high emitting scope 1, 2 and 3 companies, while ensuring that we did not attract undesirable tracking error6 or inferior performance outcomes.
What does this work tell us?
First and foremost, in the work done so far, there is nothing to indicate that we can’t meet our target of a carbon-neutral investment portfolio by 2030.
In fact, based on the analysis completed to date, we are proud to set an interim target of 35% less emissions (tCO2e/$ million invested) in the Diversified (MySuper) investment option by 2025.7
What does decarbonisation look like for NGS Super?
Our plan for decarbonisation from now until 2025, and then on until 2030 will include:
- investing in carbon-positive investments.
We have committed to making no new investments in stranded assets and will be communicating this to our investment managers over the course of 2022.
If we have a company or investment that has high scope 1, 2 or 3 emissions, and we can see that they have a sound and realistic business plan to transition to the low-carbon economy within a timeframe deemed acceptable to the Fund (taking into consideration industry trends and the overall global target of net zero by 2050), we will take an engagement approach.
We will regularly meet with the relevant company and/or investment manager to ensure they are progressing with their transformation business plans while still delivering value to the Fund.
NGS Super’s target of carbon neutral by 2030 is an ambitious one, and we are aware that not all of those companies we invest in today may be net zero by this time. But we are willing to accept companies with some level of scope 1 and 2 emissions at 2030 and beyond provided they are genuinely transitioning to the low-carbon economy, pose no transition risk, and we are obtaining acceptable risk-adjusted returns from these investments.
At 2030 we envisage that we will have investments that:
- have low or justifiable scope 1 and 2 emissions
- are carbon-neutral or
- are carbon-positive, offsetting those investments within the portfolio at point (1).
Our divestment assessment and program starts now. Any asset we deem as a stranded asset will be flagged for assessment and divestment. An exclusion list and divestment plan is being formulated.
The timing of our divestment from these companies will vary, but we have committed to have no stranded assets in the portfolio by 2025 — this ensures we can divest in the best financial interests of members.
The Fund does hold investments in unlisted unit trusts which are pooled vehicles and, at times, we don’t have veto rights on the acquisition of new assets within these funds. Redemption can also take time. We are communicating closely with our unlisted investment managers, advising of our wish not to acquire any of these assets in the future.
Investing in carbon-positive and low emission investments
We have been and will continue to seek out what we deem to be carbon-positive and low-carbon investments within our portfolio. Carbon-positive investments are investments in things like carbon capture and storage (also known as carbon sequestration) and timber or forestation projects.
Low-emission investments are investments that promote solutions for the transition to the low-carbon economy. Examples include (but are not limited to):
- renewable energy generation and distribution
- low-carbon energy generation and storage
- green bonds (financing initiatives to combat climate change).
Reporting and feedback
Each year, we commit to report on our progress against our new interim target and the end goal of net zero emissions in the investment portfolio by 2030. Each year we will:
- re-measure the carbon intensity of the portfolio and track progress
- re-evaluate the scenario analysis findings and
- reassess the Fund’s glide path analysis and pathway to a carbon neutral investment portfolio by 2030 and adjust as necessary.
Members’ best financial interests remain paramount
The work outlined above has confirmed that we can make significant progress towards our net zero by 2030 target while acting in the best financial interests of members. Acting in the best financial interests of our members is the paramount duty for the Trustee and will always be the first consideration as we embark on our decarbonisation journey and at each annual progress review. If at any point it becomes clear that we may be jeopardising our members’ best financial interests, we will adjust our goals and timeframes accordingly.
|Carbon intensity||carbon dioxide emissions per unit of energy|
|Decarbonisation||the process of reducing carbon dioxide emissions|
|Emissions||greenhouse gases which are emitted into the atmosphere from various sources|
|Glide path analysis||analysis completed to assess the levers available to the Fund to decarbonise the portfolio while also assessing potential tracking error|
|Global warming||Long-term heating of the Earth’s climate system observed since the pre-industrial period (between 1850 and 1900) due to human activities, primarily via the burning of fossil fuels which increases heat trapping greenhouse gas levels in the Earth’s atmosphere|
|Physical risks||the risks associated with climate change like extreme heat, drought, water access as well as risks like bushfires, severe storm events and flooding (where companies are exposed to physical risks, their value may be affected, positively or negatively)|
|Scenario analysis||a tool to understand the implications of climate change to prompt strategic thinking about climate risks and opportunities|
|Scope 1||direct emissions from a company or business because of their operations. Examples include emissions from company vehicles and company facilities|
|Scope 2||indirect emissions from the generation of purchased energy from a utility provider|
|Scope 3||all indirect emissions not included in scope 2 but that occur in the value chain of the reporting company. They are broken down into 15 categories and considered either upstream or downstream emissions. Examples of upstream emissions are emissions generated from business travel, waste generated in operations, purchased goods and services to name a few. Examples of downstream emissions are emissions generated from processing of sold products, use of sold products, end of life treatment of sold products etc.|
|Stranded asset||an asset that in our view cannot transition to the low-carbon economy|
|Tracking error||the divergence of a portfolio’s return from the benchmark|
|Transition risks||the risks that may eventuate as we transition to the low-carbon economy (examples include changes to land or water use policies, costs of energy, introduction of carbon pricing policies, technological change and evolving consumer behaviour or preferences — where companies are exposed to transition risks, their value may be affected, positively or negatively.|
This scenario assumes that only currently implemented policies are preserved, which leads to high physical risks. Emissions grow until about 2080, leading to approximately 3 degrees of warming. This leads to severe physical risks and irreversible changes like higher sea levels. This scenario shines a light on the long-term physical risks to the economy and financial system if we continue on our current path.
Nationally Determined Contributions (NDCs)
This scenario includes a world where all pledged policies are executed (even if not yet implemented). It assumes moderate climate action and emissions decline, but this leads to a 2.5-degree temperature baseline which is associated with moderate to severe physical risks. However, transition risks are relatively low.
This scenario assumes that global annual emissions do not decrease until 2030. This is then followed by a strong policy response from governments in an attempt to limit global warming to 2 degrees. The level of action across countries differs and this scenario leads to higher transitional and physical risks.
Divergent Net Zero
This scenario reaches net zero by 2050 but with higher costs because of divergent policies introduced across sectors and a more abrupt phase-out of fossil fuels. When compared to the Net zero by 2050 scenario, this scenario sees more stringent policy setting in the transportation and buildings sectors but less stringent policy setting in the decarbonisation of energy supply. There is also less coordination in the policy rollout, which puts more burden on consumers. Emissions under this scenario have a good chance of reaching net zero by 2050, giving at least a 50% chance of limiting global warming to below 1.5 degrees by 2100. This scenario has higher transition risks compared Net zero by 2050 but, overall, the lowest physical risks of all 6 scenarios.
Below 2 degrees
This scenario gradually increases the stringency of climate policies, giving a 67% chance of limiting global warming to below 2 degrees. This scenario assumes that policies to combat climate change are introduced immediately and become more stringent over time, although not as stringent as the Net zero by 2050 scenario. Under this scenario net zero emissions are achieved after 2070 and physical and transition risks are relatively low.
Net zero by 2050
This scenario is the most ambitious, seeking to limit global warming to 1.5 degrees, and reaching net zero by 2050. This is achieved through implementation of immediate and strict climate policy and accelerated innovation. Under this scenario we see a 50% chance of limiting global warming to below 1.5 degrees by 2100. Physical risks are relatively low in this scenario, but transition risks are high.