Climate risk and our investments/media/files/forms and...Importantly, our Investment Committee (a sub-committee of our Board) benefits from the insight of long-standing specialist

Climate risk and our investmentsNovember 2019

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ContentsIntroduction 1

Governance 2

Strategy 3

Member choice 6

Risk management 7

Climate risk in our investment options 24

© UniSuper Limited November 2019

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1

We’re passionate about securing the future for Australia’s thinkers, creators and investigators who are shaping a better tomorrow.

We believe climate change and the transition to a low carbon economy will pose investment-related risks, which is why we’ve been identifying and considering these risks for over a decade as part of our investment management and decision making process.

This, our second annual report, explains how our members’ super is exposed to the risks and opportunities of climate change, and where practical, aligns with the Taskforce for Climate-related Financial Disclosures’ (TCFD) recommendations.

This report focuses on two types of financial risks caused by climate change—physical risks (such as the effects of extreme weather events) and transition risks (which occur when moving toward a lower carbon economy).

This report explains who oversees and manages these risks, how we manage our most significant exposures, and provides details on the levels of exposure in each of our investment options.

We’ve undertaken a number of studies, assessments and projects over the years to understand our exposure to climate risks and opportunities. We also provide members with seven investment options that avoid fossil fuels, either because of a specific screen or due to the nature of their investment universe. It’s pleasing to see that companies continue to increase their focus on climate change and lowering emissions. 77% of our portfolio has set targets around emissions, up from 45% last year (January 2018). We encourage the companies we invest in to set Paris Agreement aligned targets, which will decarbonise our investment portfolio over time.

1 An international body that monitors and makes recommendations promoting international financial systems.

Taskforce for Climate-related Financial DisclosuresThe TCFD is an initiative developed by the Financial Stability Board1 to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders. In 2017 guidelines were published, and since then there has been high levels of support, with thousands of companies using the guidelines to frame their approach to climate related risks.

Paris AgreementRatified in 2016, the Paris Agreement brings together all signatory nations to combat climate change and adapt to its effect. The central aim of the Paris Agreement is to limit global temperature rise to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.

IntroductionUniSuper is the super fund dedicated to people working in the higher education and research community. With over 450,000 members, we’re one of Australia’s largest super funds and manage more than $80 billion in retirement savings.

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As an Australian Prudential Regulation Authority (APRA) regulated super fund, we have a fiduciary duty to make decisions to achieve the best financial outcome for members as a whole. APRA has stated this duty includes the requirement to consider climate risks on our investments.

Our Chief Investment Officer maintains direct responsibility and oversight of Environmental, Social and Governance (ESG) issues, as does the investment team more broadly.

Three full-time internal ESG specialists provide input into the investment management and decision-making process and support the investment team regarding ESG-related matters.

ESG and climate change related matters are considered as part of our day-to-day work, and are also discussed and elevated at regular investment team meetings and portfolio reviews. We have a collegiate, dedicated and experienced internal investment team with a culture of knowledge-sharing and expertise.

Importantly, our Investment Committee (a sub-committee of our Board) benefits from the insight of long-standing specialist investment management experts. These committee members routinely interrogate the investment team’s approach to ESG and, in particular, the management of climate risk.

GovernanceWho oversees and is responsible for managing climate risk in our investments?

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StrategyInvestment strategyWe set our investment strategy for each investment option based on its risk return objectives, considering a longer term outlook together with shorter term economic and market conditions.

Earnings sustainability is a critical aspect of our approach. Climate change is one of many factors we consider in assessing earnings sustainability for our portfolio holdings. This is particularly relevant for resource companies involved in fossil fuel production (coal, oil and gas).

These companies experience volatile earnings due to supply and demand forces affecting the price of the commodities they produce. Accordingly, each option’s exposure to commodity producers (and therefore fossil fuel production) is informed by the risk tolerance of that option (for example, the Balanced option will have a higher allocation to resources than the Defined Benefit Division).

ESG integration and engagement Key to our approach is a strong focus on engagement and collaboration. Climate risks are present in all things—they’re not just limited to our investments. It’s important that all companies we invest in manage their climate risks and have policies and systems in place for a smooth transition to a low carbon future.

Our expectations of the companies we invest in with respect to climate risks include:

A proactive approach to reducing emissions.

An understanding of the climate risks embedded in their assets/businesses.

Transparent disclosure explaining their activities and actions.

Our ESG guiding principles

We have a legal and fiduciary obligation to manage the financial outcomes of our members within the risk/return mandates of the respective investment options. We will ultimately be judged in terms of financial outcomes delivered to members.

As a long-term investor, the sustainability of a company’s earnings is of paramount importance.

In relation to security selection, the integrity and independence of the investment process can’t be compromised by external influences that may conflict with our fiduciary duty.

UniSuper is a pragmatic investor, not an ‘activist’ fund. Our initial investment in any company is predicated on sound governance, quality management and strong business fundamentals.

In the event that governance, management or business fundamentals are compromised, UniSuper will take the necessary steps to protect member interests.

ESG issues are inherently qualitative in nature and therefore difficult to quantify.

ESG factors are important considerations in determining earnings sustainability.

Climate risk and our investmentsSTRATEGY

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5 Climate risk and our investmentsSTRATEGY

Energy storage

Emissions reduction

Energy efficiency

Climate resilience

Scenario analysis

Renewable energy

Water & waste management

Remediation

The following table illustrates our approach to managing climate risks:

Examples of our priority areas of engagement

Company engagement:

• ASX focus • High levels of

engagement regarding climate risk management

Proxy voting

• Review climate related resolutions

Climate risk analysis:

• Investment due diligence

• Portfolio/Options • External managers

Ongoing monitoring

• Portfolio exposures • Carbon footprinting

Providing options for members wanting to avoid fossil fuels:

• Sustainable High Growth

• Sustainable Balanced

• Global Environmental Opportunities

Member engagement Working with:

• Investors; IGCC – Investor Group on Climate Change, ACSI – Australian Council of Superannuation Investors, Climate Action 100+

• Specialists consultants/analysts, industry advisors, Government bodies

Thought leadership

• Advocacy • Regulatory change

Active Ownership ESG Integration Member Choice Collaboration &

Communication

Fiduciary Duty

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*These options don’t have specific exclusions in place but are fossil fuel free by nature of their investment universe and/or investment process.

Member choiceWe’re confident our mainstream investment portfolios are well positioned to withstand the risks associated with climate change. However, if members wish to decrease or remove their exposure to fossil fuels, a number of choices are available.

We offer a range of investment options to give members the tools and flexibility to create a portfolio that best suits their needs.

The following options have no exposure to fossil fuels:

• Sustainable High Growth• Sustainable Balanced• Global Environmental Opportunities• Global Companies in Asia*• Listed Property*• Cash* • Australian Bonds*

Risk management

What exposure do we have to businesses likely to be impacted by the transition to a low carbon economy?

• Fossil Fuels • Infrastructure and Industrial sector• Financial Services Sector• Green products and activities

What’s the carbon footprint of our portfolio?

• Carbon footprint of listed equity holdings

What physical risks are present in our portfolio?

• Severe weather events• Rising tides

How are companies responding?

• Transitioning to a low carbon future

Climate risks and opportunities can manifest in a number of different ways—the main ones being physical risks (like the effects of extreme weather events) and transitional risks (which occur when moving toward a lower carbon economy).

We don’t separately address liability risk, which is the risk of litigation due to a failure to respond to the impacts of climate change, as it is most likely to be

targeted at companies already identified as at-risk from physical or transition risks.

In order to manage the investment-related risks posed by climate change, we need to understand what types of risks, opportunities and activities we’re exposed to.

To identify significant areas we asked the following questions:

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Climate risk and our investmentsTEMPORIBUS AUTEM

We’ve been monitoring climate risks for a long time

2018Joined the Climate Action 100+

Published inaugural Climate Risk Report

2017

Prepared and submitted low carbon registry information to the Investor Coalition on Climate Change (via the IGCC)

Engaged with all property and infrastructure investments to understand how climate risk is managed

Assessed portfolios to understand exposures to fossil fuels

Carbon footprinting assessment (found to be more carbon efficient than the benchmark)

2016 Assessed the physical resilience of our portfolio to climate change

2015 Assessed portfolios to understand exposures to fossil fuels and stranded assets

2014

Screened fossil fuel producers and explorers from our two Sustainable Options

Carbon footprinting assessment (found to be more carbon efficient than the benchmark)

2012

Engaged with unlisted property and infrastructure investment managers to understand how climate change might impact those assets and the implications of a carbon pricing mechanism

2011Participated in the Australian Institute of Superannuation Trustees (AIST)/Trucost carbon exposure study (found to be more carbon efficient than the benchmark)

2009Assessed the impact of a carbon pricing mechanism on the most carbon intensive companies in the ASX 100

Joined the Investor Group on Climate Change (IGCC)

2008Assessed the carbon exposure of listed equities portfolios on a monthly basis over a two-year period (found to be more carbon efficient than the benchmark)

2007Sustainable Balanced option introduced

First briefing to the UniSuper Board regarding climate change risk

2006 Appointed full-time ESG manager

2004 Public reporting on proxy voting activity

2001 UniSuper became a founding member of Australian Council of Superannuation Investors (ACSI)

2000 Sustainable High Growth option introduced

Climate risk and our investmentsRISK MANAGEMENT

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9 Climate risk and our investmentsRISK MANAGEMENT

What exposure do we have to businesses likely to be impacted by the transition to a low carbon economy?

FOSSIL FUELS

Background

Fossil fuels refer to coal, oil and gas. The mining/extraction (including fugitive emissions) and burning of these fuels for electricity, transport and industrial processes make up 88.6% of Australia’s CO2 emissions (as at March 2019). Given the commitments of the Paris Agreement, sectors that rely on fossil fuels are likely to attract disruption (e.g. renewable energy), additional costs (pollution scrubbers) and/or increasing levels of regulation (carbon taxes, limits on use, timed phase outs).

Why this exposure is significantFossil fuels are sources of industrial carbon emissions. The fuel that poses the highest risk is thermal coal, which is used for electricity generation. Other fuels have a more mixed outlook depending on use and alternatives (for example, metallurgical coal is used in steel manufacturing and has few alternatives, the rise in electric vehicles and alternative heating sources threaten oil, but the outlook for gas is more mixed given its use in flexible power generation supporting renewables).

Investments in fossil fuel producers are likely to experience a drop in demand in a carbon constrained future. They are also fuels that will likely attract adverse policy developments and disruptive technology.

ACROSS THE FUND

12%OF OUR EXPOSURE IS IN COMPANIES INVOLVED IN FOSSIL FUELS.

Up from 8% in January 2018. Our exposure to fossil fuels (specifically, thermal coal, oil and gas producers and related infrastructure) at any point in time varies based on market movements and investment decisions for the relevant holdings. Illustrating the level of variability at the time of writing (October 2019) we estimate our exposure to be around 9%.

By way of comparison, the ASX200 has around 23% in companies with ties to fossil fuels and the MSCI World (a global benchmark) has around 12%.

The bar chart on the following page illustrates our largest fossil fuel related positions and what proportion of our investment in these entities relates to fossil fuels. Exposure changes over 2018 included increasing holdings (largely as a result of favourable market movements) in APA Group (gas pipelines), Woodside (oil and gas producer), Aurizon (coal transport), Enbridge (US oil and gas pipelines, new addition to portfolio) and the exclusion of Rio Tinto and Wesfarmers following divestment of their fossil fuel divisions.

Carbon Capture and storage (CCS)This is a critical technology that will be required to ensure the long term viability of these fuels in a net zero carbon world. This technology is currently used for enhanced oil recovery, but may require some form of a carbon price to become commercially viable.

In the last 12 months, we have seen BHP, as a significant fossil fuel producer commit $US400M to projects that reduce emissions across its supply chain, including CCS.

UniSuper has participated in industry forums to understand this technology and its feasibility.

10Climate risk and our investmentsRISK MANAGEMENT

Fossil fuel exposures

Look-through analysis Most companies that we invest in are diversified with multiple sources of revenue. For example, in 2019, 35% of BHP’s revenues were associated with petroleum and coal, 40% from iron ore, and 25% from base metals (copper, silver, lead etc). When considering our fossil fuel exposure, the sectors most relevant would be petroleum and coal – so on a look-through basis, for every $100 we have invested in BHP, only $35 has fossil fuel exposure.

2019 Market Value

2019 FF lookthrough

2019 Thermal Coal lookthrough

0.00

$2bn

$3bn

$1bn

$4bn

$5bn

$6bn

$7bn

$8bn

$9bn

$10bnCompanies

APA Group

Woodside Petroleum Ltd

BHP Group Ltd

Macquarie Bank Ltd

Aurizon Holdings Ltd

Enbridge Inc

Rio Tinto Ltd

Wesfarmers Ltd

Oil Search Ltd

TC Energy Corp

National Grid Plc

Santos Ltd

South32 Ltd

Origin Energy Ltd

Other


The future of gas

The world’s energy systems are undergoing a significant transition—driven by the challenge of needing more energy to support continued economic growth and rising prosperity in developing economies, together with the need for a fall in carbon emissions to meet climate goals. This transition represents a significant challenge for fossil fuels, which currently account for about 85% of primary energy consumption. One such fossil fuel, natural gas, is a versatile and efficient fuel used in a variety of applications such as electricity generation, industry and heating for buildings.

Natural gas is often cited as a transition fuel to help meet the dual energy challenge of lower carbon emissions and reliability and, as such, is forecast by many to overtake coal and challenge oil as the world’s largest energy source. The key arguments for this to occur include the increasing availability of relatively cheap gas (aided by growing supplies of liquefied natural gas) and lower greenhouse gas emissions relative to other fossil fuels.

The International Energy Association (IEA) estimates that “98% of gas consumed today has lower lifecycle emissions intensity than coal when used for power or heat” taking into account both CO2 and fugitive methane emissions. Besides the potential for lower greenhouse emissions relative to other fossil fuels, natural gas produces lower levels of harmful emissions such as nitrous oxides and doesn’t produce ash or particulates that can cause health problems.

In order for natural gas to fulfil its role as a transition fuel, infrastructure will need to be built. The environmental case for building new gas infrastructure is complex, as policy makers need to be cognisant of locking in gas related emissions—even as they reduce emissions from coal especially in electricity generation. Increasingly affordable renewable power could make gas investments unprofitable, especially if batteries improve and storage systems are better able to provide electricity when it’s needed. For now, we believe natural gas has a significant role in delivering services that can’t be cost-effectively provided by low carbon alternatives, such as peak winter heating, seasonal storage and supporting the intermittency of renewables generation.


INFRASTRUCTURE AND INDUSTRIAL SECTOR

Background

This sector comprises supporting infrastructure and industrial processes reliant on high emission services or processes. For example, airports reliant on airlines and steel manufacturers requiring coal-fired blast furnaces are at risk from a climate transition.

Depending on the nature of the disruption and the availability of alternatives (e.g. Sydney has fewer alternatives to air transport than Paris), these companies will need to be adaptive and invest in new systems to reduce emissions.

Why this exposure is significant

18%OF OUR INVESTMENTS RELY ON OR SUPPORT HIGH EMISSION ACTIVITYwith our largest holdings being Transurban (5.8%), Sydney Airport (3.4%), Aurizon (1.3%) and Aena (European airports 0.6%).

We actively engage with our larger holdings, closely monitoring how they are managing these disruptive threats. The nature of the client base, product substitution impacts (i.e. internal combustion vs electric vs autonomous vehicles) and technology changes are all aspects that our internal investment team monitors.

Transurban and autonomous vehiclesThe automotive sector is experiencing significant disruption—not only with the shift to electric vehicles (EVs), but also the increasing use of autonomous technology. While we see the take up of EVs reducing some of the environmental impacts of toll roads (e.g. there are no tailpipe emissions and much lower noise impacts), the impact of autonomous technology is more mixed.

We’ve been discussing these changes with Transurban for the last couple of years, with the company running a number of trials to:

• learn how the existing technology works on its roads, to ensure they are suitable and safe

• survey road users to better understand how quickly this technology may be adopted

• consider how road infrastructure (e.g. signs, lines and markings) can be developed to ensure road safety isn’t compromised.

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FINANCIAL SERVICES SECTOR

Background

The banking and insurance sectors are key enablers of companies and individuals that invest across the economy, including fossil fuels and renewables. The banking sector is expected to be resilient to climate risks and we expect banks to manage and report on how they’re exposed to them.

The insurance sector is exposed to many risks and opportunities associated with climate—for example, more frequent severe weather events result in higher claims but also increase the need for insurance.


23%OF OUR INVESTMENTS ARE IN FINANCIAL SERVICES.

Of this exposure, 60% (14% of total holdings) is in Australian banks. Through our ongoing engagement and improved company reporting, we are satisfied that Australian banks have robust approaches to managing climate risks and that they are targeting growth in renewable financing, while also reducing their exposure to the fossil fuel sector. Overall, fossil fuel financing represents around 0.5% of their loan book, with renewables and climate change solutions representing around 1%.

1% of our investments are in insurance companies. We have engaged extensively with our largest holdings in this sector (IAG, QBE, AIA and Suncorp) to understand how they are working to manage their risks and to better understand how they are working with stakeholders (customers and governments) to build resilience in the communities that they insure.

IAG Investor roundtableIn 2019, UniSuper hosted an investor roundtable with representatives from IAG to get a comprehensive understanding of how the company was managing its climate risks (along with other ESG risks). This event was well attended by investors and provided valuable insights on initiatives such as:

• Working with James Cook University to understand how best to improve the resilience of existing housing in severe wind events

• Prioritising “Good ‘hoods” initiatives in areas where extreme heat events are linked to more break-ins

• Working with multiple levels of government to encourage investments that improve building standards and the resilience of local communities.


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GREEN PRODUCTS AND ACTIVITIES*

Background

Companies are responding to the opportunities presented by climate change through green products and activities in multiple sectors—such as plantation timber, renewable energy, energy efficiency, water and waste management and green buildings.

Why this sector is significant

5%OF OUR INVESTMENTS ARE IN GREEN PRODUCTS AND ACTIVITIES.

Our Global Environmental Opportunities investment option is the primary way that members can invest directly in these companies.

The Sustainable Balanced option also invests in Green Bonds. Other investments that provide environmental benefits and will assist with resilience in a changing climate include Aquasure (Victorian Desalination Plant) and timber plantations in Victoria and New Zealand.

To create many of these products (renewable energy and energy-efficient technologies in particular), minerals such as copper, steel, aluminium, zinc, nickel, silicon, lithium and rare earths are required—so some miners may benefit from increased demand. These companies are expected to be able to grow their business in a carbon-constrained world. Our largest exposures to these minerals are through BHP and Rio Tinto.

* As defined by MSCI Sustainable Impacts Database and the EU sustainable finance TEG report taxonomy.


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What’s the carbon footprint of our portfolio?

CARBON FOOTPRINT OF EQUITY HOLDINGS

Background

Carbon footprinting is a commonly used tool to assess and compare companies on their emissions.

There are three types of carbon footprints;

Scope 1 Direct emissions, i.e. on-site generation by the company.

Scope 2 Indirect emissions, i.e. emissions associated with electricity purchased by the company.

Scope 3 Emissions associated with the company’s supply chain or in the use of its products, which have not been reported.

Companies with a higher carbon footprint will see higher costs and/or greater regulation in a low carbon world. The impact of these costs on the profitability of a particular business will depend on its ability to reduce its emissions, pass on the increased costs and the cost of alternatives.

Why this is significant

We regularly review the carbon intensity of our investments’ equity holdings. Our most recent analysis suggests that while the carbon intensity of many of our investment options have fallen since 2018, their relative carbon intensity have increased since our previous report, as the intensity of the benchmark (MSCI World) has fallen more.

We acknowledge that there are limitations to this analysis: • Reliance on company data—a range of different

methodologies are used so inconsistencies arise. Information is patchy (with only 64% of the benchmark (MSCI World) reporting this data) and as such, portfolio results are not comparable through time. For example, our previous report had 75% of the benchmark with reported data. It’s difficult to know if the fall in emissions that we see in the benchmark is due to true emissions reductions or due to the companies no longer disclosing.

• The tools used to calculate the carbon footprints rely on a number of assumptions.

• Lifecycle emissions (Scope 1, 2 and 3) more clearly illustrate the impact of the type of product or service. For example, companies making solar panels have a high carbon footprint but the products they produce reduce emissions in the long term. By comparison, iron ore mining—a relatively low carbon activity—requires high-emitting smelting to turn the ore into steel.

• While it’s important that companies are aware of their Scope 3 emissions and do what they can to reduce them, they are challenging to use for portfolio analysis as the same emissions can be counted multiple times. We therefore exclude Scope 3 emissions from our calculations.

• It provides no insight into the level of disruption and/or substitution risk (‘asset stranding’).

• We have used the MSCI World to benchmark our investment options, which has a carbon intensity approximately two thirds that of the ASX200. Across the fund, our carbon intensity is below the benchmark. Specific investment information is provided in the section ‘Climate risk in our investment options’.

Nevertheless, carbon footprinting provides another lens through which to view our portfolios. This, and the other analysis we’ve done, helps validate that our portfolios are well positioned from a climate risk management perspective.Equity holdings

This analysis considers our listed share holdings, as this represents our ownership of companies (and therefore has some way of attributing a share of emissions). It also covers listed domestic and global equities.

Want to know more?Check your investment options’ emissions in the section Climate risk in our investment options (see page 24).


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agriculture, forestry & other land use

Scope 1 Scope 2 Scope 3

industrial processes & product use

stationary fuel combination

in-boundary waste & wastewater

out-of-boundary waste & wastewater

other indirect emissions

transmission & distribution

out-of-boundary transportationin-boundary transportation

grid-supplied energy

We have calculated our intensity as follows:

company value

UniSuper’s investment

Scope 1 emissions Scope 2 emissions



What physical risks are present in our portfolio?

SEVERE WEATHER EVENTS

Background

Climate models suggest that global warming will result in more frequent very hot days, longer dry spells and more frequent heavy rain events (although with significant regional variation). Companies operating in regions facing severe weather events need to invest in more resilient infrastructure and systems to reduce the financial impact of these events. There are increasing concerns around the availability of insurance for events that are no longer seen as “acts of God” but as part of the regular operating environment.

These risks are likely to become higher as temperatures rise across the globe. This risk is separate to, but can compound the risks of, rising sea levels (discussed on the following pages).


We use the Lloyds City Risk index 2018 to identify the geographic areas most at risk of severe weather events. This analysis found that the coastal cities in Asia are most vulnerable (due to the likelihood of extreme weather events, population density, wealth at risk and the ability of the country to recover), as set out in the map on the following page:

ACROSS THE FUND

4%OF OUR EXPOSURES ARE TO COMPANIES DOMICILED IN ASIA MOST AT RISK FROM SEVERE WEATHER EVENTS.

We also note that this area is important for global supply chains, and have discussed how supply chain risks are managed with many companies that have exposure to this region.

72% OF OUR HOLDINGS ARE IN AUSTRALIAN ENTITIES (COMPANIES AND GOVERNMENTS). Generally, the economic impact of severe weather is less in Australia, due to lower population density and higher quality building stock and infrastructure.

As mentioned earlier, only 1% of our investments are in insurance companies. See financial services (page 13) for an example of how these companies are managing their risks to severe weather.

We invest in Aquasure (the Victorian desalination plant), which provides Victoria with additional resilience for periods of low rainfall.

Supply chain: chemicalsChemical manufacturers rely on a relatively small number of crackers to create the building blocks of the chemical industry. While our direct investments in chemical companies is small, their products form the basis of many other sectors where we have substantial investments—e.g. healthcare, beauty, building materials and real estate (paints, coatings and foams).

We have discussed with a major global chemical producer how they ensured that their crackers, located in Asia and along the Gulf of Mexico, can withstand severe weather events. These risks were a consideration for both continuing operations and supporting transportation infrastructure. We also discussed how extreme weather events would increase both the likelihood and severity of environmental risks such as a leak or a spill.


AUSTRALIA

INDONESIA

Taipei

Manilla

Dongguan

Xiamen

TokyoOsaka

HangzhouShanghaiNingbo

Seoul

MALAYSIA

THAILAND

CAMBODIA

VIETNAM

LAO

CHINA

JAPAN

SOUTHKOREA

NORTHKOREA

SINGAPORE

PHILIPPINES

BRUNEI

TIMOR-LESTE

Natural Catastrophe and Climate risks update

Billion %GDP

Taipei 10.78 5.99

Manilla 9.57 6.98

Tokyo 9.03 0.6

Osaka 5.69 0.89

Los Angeles 5.44 0.53

Hangzhou 4.78 2.48

Ningbo 3.75 2.47

Shanghai 3.68 0.67

New York 3.53 0.21

Seoul 3.5 1.07

Xiamen 3.36 4.88

Santa Domingo 2.88

Port Au Prince 2.65

Dongguan 2.44

Kolkata 2.41

Quito 2.34

Australian cities

Melbourne 0.18

Adelaide 0.22

Sydney 0.13

Brisbane 0.09

Perth 0.09

Vulnerable Asian cities are shown on the map to the right in red.

TOP CITIES GROSS DOMESTIC PRODUCT (GDP) AT RISK: NATURAL THREATS

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RISING TIDES

Background

Another known result of global warming is rising sea levels due to melting glaciers. Due to gravity, topography, the Earth’s rotation, temperature, winds and currents, the local experience of sea level rise can vary in different locations. As the Australian economy is concentrated around coastlines, the risk of sea levels rising requires monitoring and forms part of our due diligence when considering new investments.

Sea levels have risen in Australia at an average of 2.1mm/year over the last 50 years (with a 6cm rise over the last 20 years (Australian Academy of Science, n.d.)) and this is expected to continue as carbon emissions continue to rise.


To better understand the risks rising sea levels could potentially have on these assets, in 2016 we mapped our major physical asset exposures. We used the Coastal Risk tool developed by NGIS to visually assess our exposures under a 4 degree scenario (IPCC RPC8.5 which has a median sea level rise of 0.74m by 2100).

This exercise indicated that the vast majority of our large physical investments are unlikely to be at risk due to rising tides.

By way of example of this risk assessment process, the maps below show the geographic locations where approximately 50% of our Defined Benefit Division (DBD) is invested, and a close up of Sydney and the physical location of our assets. For other options, pages in the section ‘Climate risk in our investment options’ will show if Sydney Airport is a ‘top five’ climate risk investment for each option.

Sydney AirportSydney Airport represents our biggest direct exposure to rising tides. Over the last three years we have engaged with Sydney Airport to get comfort around its climate adaptation plans and the actions it’s taking to mitigate this risk. In 2019, Sydney Airport produced a TCFD compliant report as part of its sustainability report and incorporated climate resilience (as well as adaptation measures such as renewable energy and energy efficiency) into its 2039 Master Plan.



Investment Group

DBD physical exposures: size of the spots indicate the size of the investment.

Transurban

Sydney Airport

Scentre Group

APA Group

GPT

Vicinity

ASX Limited

Unlisted property

Unlisted infrastructure

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TRANSITIONING TO A LOW CARBON FUTURE

Background

All companies and organisations have a responsibility to consider the risks of climate change and to ensure that their business is resilient in a low carbon future. The global commitment to the Paris Agreement requires economies to be net zero carbon emissions by 2050, with a 55% reduction in emissions by 2030 to limit warming to 1.5 degrees (IPCC Special report – Global Warming of 1.5 degrees 2018).

While some businesses are more carbon intensive than others, companies that are not actively managing their carbon emissions are more likely to be at risk if there is a rapid decarbonisation.

We have been working with Australian companies for over 10 years to understand how they’re mitigating the risks posed by climate change.

In addition to direct engagement, we use analytical and research tools to assess and understand what actions and commitments our investee companies (across our debt and equity holdings) are making.

Why this is significant

77%OF OUR PORTFOLIO HAVE SET EMISSION TARGETS.

Comparing this analysis with last year, there has been a significant increase in the number of companies setting targets around emissions (from 45% in 2018 to 77% of our portfolio in 2019), using alternative energy sources (from 68% to 81%) and improving energy efficiency (from 82% to 91%).

Importantly, there has also been an increase in accountability and more aggressive targets, with 10.5% of our portfolio signed up to RE100 (committing to use 100% renewable power), and 7.2% signing up to Science Based Targets, committing to aligning emissions with the goals of the Paris Agreement.

NEXTDCNEXTDC is an Australian data centre provider. Energy efficiency has always been at the core of its operations and value proposition to customers, but it is an energy intensive business and experiencing rapid growth. The company has a target to be 100% renewable and has been involved in renewable energy projects since 2014. However, the business imperative of 100% availability meant renewables and storage are not yet scalable solutions in the short term. Following a meeting with UniSuper in 2018 and an introduction to Qantas Future Planet, NEXTDC identified that carbon offsets would be a way to manage their emissions until renewables reached the required level of reliability. The company is now offsetting 100% of its operational emissions, with the aim to get 100% of its customers to offset their emissions at NEXTDC facilities.



Operational transition efforts

Across our whole investment portfolio what are the organisations we invest in doing to transition to a low carbon future?

Some efforts/sets targets (62%)

No efforts/information (10%)



Science-based target/aggressive efforts (18%)



Science-based target/aggressive efforts (26%)

Renewable Energy Use

Carbon Reduction

Targets

Energy Efficiency

Science-based target/aggressive efforts

No efforts/information

Sets targets/ some efforts


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Climate risk in our investment optionsThis analysis considers climate risks only. Please refer to How we invest your money for the investment risk and return profile for each option.

We’ve considered the risks and opportunities of climate risk in three ways for each of our investment options:

Climate risk exposure

How will the businesses we invest in be affected by climate risks?

Carbon footprint

What is the carbon intensity of the listed equities in option in comparison to a global benchmark?

UniSuper has used MSCI World as the benchmark. This benchmark has a carbon intensity approximately two thirds that of the ASX200.

Operational transition efforts

What are the organisations we invest in doing to transition to a low carbon future?

Due to the nature of the underlying investments, the following options are not presented in the following section: • Diversified Credit • Australian Bonds • Cash

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Fossil fuel exposed companies

Thermal coal, oil and gas exposures

Fossil fuel reliant companies (industrials)

Real estate

Green real estate

Green product (>25% of revenue)

Financial services

Other




Climate risk exposures


REGIONAL EXPOSURES – SEVERE WEATHER

Asia is the most at risk of natural disasters due to frequency of events, population concentration and time to recover.

Australia is a low risk due to low population density, frequency of events and more resilient infrastructure.

Region % of portfolio Level of risk

Asia (including Japan)

2 High

Australia 83 Low

DISRUPTION RISKS

The five largest investments in this option most at risk due to a decarbonising economy:

Holding % of portfolio

Transurban Group 9

Sydney Airport 7

APA Group 6

AENA SME SA 2

Enbridge Inc 1

Carbon footprint of equitiesSCOPE 1 AND 2

Globally, only 6/10 companies report their carbon emissions. This chart shows the relative carbon footprint of 63% of the equities in the option compared to 64% of the MSCI World Benchmark.

THIS OPTION IS MORE CARBON EFFICIENT THAN THE BENCHMARK.44%

Operation transition effortsAlmost all of the Defined Benefit option is invested in companies that are focused on reducing emissions, with 74% setting targets, 84% using renewable energy and 93% putting in place energy efficiency programs.

Carbon reduction

targets

Renewable energy use

Energy efficiency

TRANSITION RISK EXPOSURE

Defined Benefit

26




Real estate

Green real estate


Financial services

Other











3 High

Australia 87 Low

DISRUPTION RISKS



Transurban Group 2

Adelaide Airport Ltd 1

Sydney Airport 1

APA Group 1

BHP Group Ltd 1



Operation transition effortsAlmost all of the Conservative option is invested in companies that are focused on reducing emissions, with 79% setting targets, 84% using renewable energy and 91% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Conservative


27




Real estate

Green real estate


Financial services

Other











2 High

Australia 85 Low

DISRUPTION RISKS



Transurban Group 3

Sydney Airport 2

APA Group 2

AENA SME SA 1

Woodside Petroleum Ltd 1



Operation transition effortsAlmost all of the Conservative Balanced option is invested in companies that are focused on reducing emissions, with 77% setting targets, 82% using renewable energy and 93% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Conservative Balanced


28




Real estate

Green real estate


Financial services

Other











8 High

Australia 70 Low

DISRUPTION RISKS



Transurban Group 6

Sydney Airport 4

BHP Group Ltd 3


Rio Tinto Ltd 1



Operation transition effortsMost of the Balanced option is invested in companies that are focused on reducing emissions, with 75% setting targets, 78% using renewable energy and 88% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Balanced

THIS OPTION IS MORE CARBON INTENSIVE THAN THE BENCHMARK.1%

29




Real estate

Green real estate


Financial services

Other











4 High

Australia 66 Low

DISRUPTION RISKS




Operation transition effortsAlmost all of the Sustainable Balanced option is invested in companies that are focused on reducing emissions, with 78% setting targets, 80% using renewable energy and 91% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Sustainable Balanced


Transurban Group 7

Sydney Airport 3

NEXTDC Ltd 1

James Hardie Industries PLC 1

Reliance Worldwide Corp Ltd 1




Some efforts / sets targets

Green bond

30




Real estate

Green real estate


Financial services

Other











10 High

Australia 56 Low

DISRUPTION RISKS



BHP Group Ltd 2


Sydney Airport 1

Rio Tinto Ltd 1




Operation transition effortsMost of the Growth option is invested in companies that are focused on reducing emissions, with 66% setting targets, 70% using renewable energy and 81% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Growth


31




Real estate

Green real estate


Financial services

Other











11 High

Australia 54 Low

DISRUPTION RISKS



BHP Group Ltd 4


Transurban Group 1





Operation transition effortsMost of the High Growth option is invested in companies that are focused on reducing emissions, with 63% setting targets, 67% using renewable energy and 81% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


High Growth


32




Real estate

Green real estate


Financial services

Other











5 High

Australia 56 Low

DISRUPTION RISKS



Sydney Airport 4

Transurban Group 3

NEXTDC Ltd 2


Reliance Worldwide Corp Ltd 2



Operation transition effortsAlmost all of the Sustainable High Growth option is invested in companies that are focused on reducing emissions, with 79% setting targets, 83% using renewable energy and 97% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Sustainable High Growth


33




Real estate

Green real estate


Financial services

Other











8 High

Australia 50 Low



Operation transition effortsMost of the Listed Property option is invested in companies that are focused on reducing emissions, with 66% setting targets, 70% using renewable energy and 80% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Listed Property


34




Real estate

Green real estate


Financial services

Other











0 High

Australia 98 Low

DISRUPTION RISKS



BHP Group Ltd 8


Rio Tinto Ltd 3

Transurban Group 3

Sydney Airport 2



Operation transition effortsMost of the Australian Shares option is invested in companies that are focused on reducing emissions, with 67% setting targets, 66% using renewable energy and 89% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Australian Shares


35




Real estate

Green real estate


Financial services

Other











25 High

Australia 1 Low

DISRUPTION RISKS



AIA Group Ltd 1

Nestle SA-REG 0

The Boeing Co 0

The Walt Disney Co 0

Pepsico Inc 0



Operation transition effortsMost of the International Shares option is invested in companies that are focused on reducing emissions, with 63% setting targets, 67% using renewable energy and 76% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


International Shares


36




Real estate

Green real estate


Financial services

Other











29 High

Australia 2 Low

DISRUPTION RISKS



Central Japan Railway Co 6

East Japan Railway Co 6

Digital Realty Trust 6

Citrix Systems Inc 4

Xylem Inc 4



Operation transition effortsMost of the Global Environmental Opportunities option is invested in companies that are focused on reducing emissions, with 61% setting targets, 67% using renewable energy and 66% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Global Environmental Opportunities


37




Real estate

Green real estate


Financial services

Other











0 High

Australia 100 Low

DISRUPTION RISKS



Sydney Airport 7


Transurban Group 6

APA Group 5

Aurizon Holdings Ltd 4



Operation transition effortsMost of the Australian Equity Income option is invested in companies that are focused on reducing emissions, with 81% setting targets, 76% using renewable energy and 95% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency


Australian Equity Income


38




Real estate

Green real estate


Financial services

Other




Australian Equity Income

Global Companies in AsiaClimate risk exposures







10 High

Australia 3 Low

DISRUPTION RISKS



The Boeing Co 2

The Walt Disney Co 2

Pepsico Inc 2

Nestle SA-REG 2

Unilever NV-CVA 2



Operation transition effortsAlmost all of the Global Companies in Asia option is invested in companies that are focused on reducing emissions, with 92% setting targets, 95% using renewable energy and 98% putting in place energy efficiency programs.

Carbon reduction

targets


Energy efficiency



39 Climate risk and our investments

Sources and referencesLloyds City Risk Index https://cityriskindex.lloyds.com/

The Science of Climate Change Retrieved from https://www.science.org.au/education/immunisation-climate-change- genetic-modification/science-climate-change

Coastal Risk Australia Retrieved from http://coastalrisk.com.au/

MSCI ESG tools for company analysis and revenue splits (oil, gas, coal, green revenues) (subscription) https://www.msci.com/research/esg-research

RE100 (Renewable Energy commitments) http://there100.org/

Science Based Targets https://sciencebasedtargets.org/

Coast Adapt (understanding flood and erosion risk tools) https://coastadapt.com.au/how-to-pages/use-national-mapping-help-understand-flood-and- erosion-risk

Water Observations from Space https://www.nationalmap.gov.au/

Transition Monitor (not reported, but findings are consistent with analysis presented in report) https://www.transitionmonitor.com/

Taskforce for Climate Related Financial Disclosures https://www.fsb-tcfd.org/

Westpac 2018 Sustainability Report (Climate disclosures) https://www.2018annualreport.westpacgroup. com.au/downloads/2018-Sustainability- Performance-Report.pdf

CBA 2018 Annual Report (climate disclosures) https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/fy18/cba-annual-report-2018.pdf

Commonwealth of Australia (2019). Quarterly Update of Australia’s National Greenhouse Gas Inventory: March 2019. Commonwealth of Australia. Available at http://www.environment.gov.au/system/files/resources/6686d48f-3f9c-448d-a1b7-7e410fe4f376/files/nggi-quarterly-update-mar-2019.pdf

The Role of Gas in Today’s Energy Transitions (2019) Retrieved from https://www.iea.org/publications/roleofgas/?utm_content=buffer2f1d6&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

BHP to invest US$400m to address climate change (2019) Retrieved from https://www.bhp.com/media-and-insights/news-releases/2019/07/bhp-to-invest-us400m-to-address-climate-change

The Paris Agreement (2019) Retrieved from https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

Task Force on Climate-Related Disclosures (2017 Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures. Task Force on Climate-Related Disclosures. Retrieved from https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf

Intergovernmental Panel on Climate Change (2018)Special Report: Global Warming of 1.5 degrees. IPCC. Retrieved from https://www.ipcc.ch/sr15/

Reducing our impact on Australia’s natural resources and environment Retrieved from https://www.nextdc.com/data-centres/environmental-sustainability

2018 Annual Reporting Suite (2018) Retrieved from https://www.bhp.com/media-and-insights/reports-and-presentations/2018/09/2018-annual-reporting-suite

APRA (2019) Climate change: Awareness to action. APRA. Retrieved from https://www.apra.gov.au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf

Statistics Retrieved from https://www.iea.org/statistics/

ESG Sustainable Impact Metrics MSCI (2019) Retrieved from https://www.msci.com/esg-sustainable-impact-metrics

EU taxonomy for sustainable activities (2019) Retrieved 22 October 2019, from https://ec.europa. eu/info/publications/sustainable-finance-teg-taxonomy_en

How are sea levels changing? (n.d.) Retrieved from https://www.science.org.au/learning/general-audience/science-climate-change/6-how-are-sea-levels-changing.

NGIS: Digital mapping services & training https://ngis.com.au/

40Climate risk and our investments

LimitationsUnless otherwise mentioned, all analysis refers to UniSuper’s combined equity and bond exposures (excluding cash and futures positions) as at 30 June 2019.

We have relied on third party data tools to assist us with this analysis. While we believe at a high level our exposures are portrayed accurately, we recognise that the information is incomplete and uses varying methodologies and assumptions in emissions calculations, assessments of revenues etc.

This report is not to suggest any particular view of the future will hold true, and readers may disagree with our view or assessment of risk. Climate risk is one of a myriad of risks that any company faces, and companies facing significant climate risks may still be good investments due to other factors such as price, management, mitigation strategies, transformation strategies, etc.

CONTACT US 1800 331 685 +61 3 8831 7901

WEBSITE unisuper.com.au

EMAIL [email protected]

UNISUPER ADVICE 1800 823 842 +61 3 8831 7916

ADDRESS UniSuper Level 1, 385 Bourke Street Melbourne Vic 3000 Australia

UNIS00134 1119

This Report has been prepared by UniSuper Management Pty Ltd on behalf of and issued by UniSuper Limited as Trustee of UniSuper.

This information is of a general nature only and does not take into account your personal financial situation or needs. Before making any decision in relation to your UniSuper membership, you should consider your personal circumstances, the relevant product disclosure statement from UniSuper for your membership category and whether to consult a licensed financial adviser.

Every care has been taken with the information provided in this publication. However, because of the complex nature of superannuation and taxation law and the frequent changes occurring, UniSuper Limited reserves the right to correct any error or omission. If there is any discrepancy between this publication and the Trust Deed and Regulations, the Trust Deed and Regulations will prevail.

Information in this publication is current as at the date of publication, but may change in the future. UniSuper is referred to throughout this document as “UniSuper” or the “Fund” (ABN 91 385 943 850, MySuper Authorisation No. 91385943850448).

UniSuper Limited (USL) is the corporate trustee of the Fund and is referred to throughout this document as “UniSuper Limited” or the “Trustee” (ABN 54 006 027 121/ AFSL No 492806).

UniSuper Management Pty Ltd is the administrator of the Fund (ABN 91 006 961 799/AFSL No 235907). USM is wholly owned by USL in its capacity as UniSuper’s Trustee.

© UniSuper Limited November 2019

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