Sunsuper strongly believes that properly understanding and assessing the likely material risks and opportunities of its investments is a key part of our duty to members. As an integral part of this duty, we have long recognised that environmental, social and governance (ESG) issues have the potential to affect the value of our members’ assets. All other things being equal, entities that best manage ESG factors are more likely to be financially sustainable in the long term.
To best protect and manage investments for the long term, we consider environmental, social and governance ESG risks, impacts and opportunities in our investment decision-making process.
What this means is that we believe a practical and balanced approach to ESG management is most effective. A practical approach recognises that, in most cases, it is difficult to identify any single investment as being unambiguously “good” or “bad” from an ESG perspective. This practicality leads to being balanced: on the one hand being willing to engage with businesses we may invest in to encourage positive change in relation to ESG factors, and on the other hand being willing to exclude certain investments should a company’s ESG approach not align with ours.
What are environmental, social and governance (ESG) issues?
Environmental: Factors arising from companies interactions with the physical world
Social: Factors arising from companies interactions with employees, suppliers, customers & communities
Governance: Factors arising from company oversight structure & policies
|Climate change & carbon emissions||Human rights||Board independence, structure & diversity|
|Waste & pollution||Slave & child labour||Executive remuneration|
|Water scarcity||Health & safety||Aggressive tax avoidance|
What is our approach to ESG issues?
Our approach to ESG issues on a daily basis is overseen by our Head of Responsible Investment, who reports to our Chief Investment Officer and advises the Sunsuper Board and Investment Committee on ESG issues.
As investors, we are reluctant to exclude investments as this limits the investable universe and has the potential to create inefficient portfolios. We find that, more often than not, achieving positive change on ESG issues requires engagement, which generally requires having a “seat at the table”, and those seats are far more readily available to active investors. Blanket exclusions on particular investments also reduce our ability to help drive positive change, but in a number of cases may be the preferred option. For example, as part of our regular investment review cycle, Sunsuper made the decision in March 2013 to divest its investment in tobacco manufacturers by June 2013. We have upheld this divestment for the last five years and have re-validated the investment case to stay divested.
Sunsuper’s Social Licence to Invest (SLI)
As a universal investor, Sunsuper has adopted the concept of a Social Licence to Invest structure for our ESG and stewardship activities. Our Social Licence to Invest (SLI) is a framework to consider the extent to which our investments are responsible and informs our actions for material ESG issues. The SLI includes five mechanisms for action: Exclusion, Activism, Engagement, Watch and Support.
Also known as negative screening, exclusion is the ultimate sanction against entities. Entities are excluded when all other options have been exhausted or where there is no conceivable way that Activism will yield the desired result, such as tobacco manufacturing.
Activism involves taking a more vocal attitude to expressing our concerns and desires as an investor. Sunsuper may take this action in the event that engagement has failed over an extended period of time. Actions may include statements to the press, sponsoring shareholder resolutions at annual general meetings, calling shareholder meetings, writing to other shareholders, writing open letters to companies, and participating in shareholder class action lawsuits.
This is Sunsuper’s preferred approach. Engagement is typically conducted behind closed doors where views can be expressed freely. Engagement activities are often followed up via proxy voting. When engagement on a particular ESG issue is unsuccessful, the issue may be elevated to Activism.
This implies a more passive approach towards an issue. Here we continue to monitor an issue through broker research, media and other third-party sources. We will explore with managers and investee companies to ascertain the magnitude of the risk or opportunity, and their strategies to manage or take advantage of it.
This action is different from the actions above as it denotes a positive sentiment related to an issue Sunsuper supports. We can make investments that both meet our financial return objectives and provide a measurable social benefit or environmental impact.
The Socially Conscious Balanced (SCB) investment option
While Sunsuper applies ESG criteria across all our investment options, we recognise that members may wish to invest according to a wider set of ethical criteria than those that apply to Sunsuper’s other investment options. The Socially Conscious Balanced option seeks to invest with managers that are leaders in their responsible approach to ESG considerations. These managers are required to avoid companies operating within sectors assessed to have a high negative social or environmental impact. Such ethical exclusions have included companies with a material exposure to the production or manufacture of tobacco, nuclear and controversial armaments, alcohol, pornography, or to the provision of gambling or live animal export services. A company with more than 5 per cent of its total revenue from these industries constitutes material exposure.
In addition to the existing exclusions outlined above, most fossil fuel producers and energy generators will now be excluded, a decision which we believe will significantly increase the sustainability of the portfolio and lower its overall carbon footprint.
If you are considering whether the investment option for your super is the right one for you, you should speak to your financial adviser or to one of Sunsuper’s advisers. You can give Sunsuper a call on 13 11 84 or to change your investment option online, log in to Member Online.