Super funds need to set ESG targets in portfolios

It is important for investors, including superannuation funds, to start setting environmental, social and governance (ESG) targets in their portfolios to drive change, according to First State Super.

Speaking on a Bloomberg webinar panel on ESG, First State Super head of responsible investment, Liza McDonald said funds along with the companies funds were invested in needed to set targets for issues such as carbon emissions.

“We are investing on behalf of our members’ money to generate long-term sustainable returns and it’s really Important for investors to send message to companies they’re invested in.  We continually ask them to set targets to reduce emissions and we need to do that ourselves – we have set targets across our portfolio and it is not easy and it will take time to do it,” McDonald said.

“We’re committed to reducing the emissions profile and the opportunities that come from climate change and investing. By us setting targets we are advocating which gets pushed down to companies and sectors we’re invested in that they need to set targets as well.

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“Just one fund setting targets is not going to solve the emissions reduction issue and the fact that we actually need to transition to a low carbon economy. We really need the investment community to start setting targets in their portfolios.”

McDonald said setting targets would drive the change needed in companies and in assets super funds owned and while it was a lot of work, it needed the whole investment community to make the change.

A poll conducted during the webinar found that 71% of participants thought collaboration among investors such as Climate Action 100 plus and Investor Group on Climate Change was the most effective way to change a company’s action. This was followed by private company engagement at 29%.

McDonald said engagement was one of the most effective tools investors had but that shareholder resolutions was also important.

“There’s a role for private and collaborative depending on shareholding size, and media attention is really highlighting the debate and issues shareholders are holding companies to account,” she said.

“Also voting rights and how we vote on resolutions are important and it’s not just shareholder proposals but also remuneration. Shareholders may be expressing a desire for change and improve practices and managing issues.

“We have seen an increased support for shareholder support on climate issues with the majority put up by NGOs versus investors. I think we’ll see a change in that as we go down the track for investors putting up their own shareholder proposals to signal to companies that we want change.”

She noted that when engagement stopped being effective then divestment was an option. McDonald gave the example of the superannuation fund divesting from thermal coal and no amount of engagement was going to change the product or service the company does.