Case study by AustralianSuper

AustralianSuper, one of Australia’s largest all-profits-for-members pension funds, has been investing in infrastructure since 1994. Infrastructure plays an important role in the fund’s asset allocation by enhancing returns and reducing volatility. Over a third of the 20 largest assets in the fund are infrastructure assets (the remainder are Australian equities). Several of the infrastructure assets have been owned by our fund managers since the 1990s. We believe it is important that our fund managers work to enhance the long term sustainability of these assets on an ongoing basis.

Key findings

  • Owners of unlisted infrastructure assets have a responsibility to manage the assets for their long term sustainability. Using ESG considerations provides a framework for continuous improvement of infrastructure assets which ultimately enhances returns.
  • Climate change can be a significant risk for infrastructure assets, based on their location and the type of asset. It is crucial for owners and management to understand the expected future physical impacts on their assets and to start planning for them now, so future returns remain intact.

ESG and unlisted infrastructure

For AustralianSuper, the sustainability of infrastructure investments includes the ongoing delivery of operations (generally the provision of a service to the community) as well as profits and returns. Applying ESG considerations to the management of infrastructure assets assists in the assets delivering as required and enhances the returns to investors, and ultimately to our members.

As an example, one of our oil pipelines in the US is currently benefitting from the foresight of the board that expected higher safety standards than required from the outset. After the BP oil spill, the regulatory requirements for safety at oil pipelines were increased. However, our asset had already invested above this level of safety, thereby reducing the need for remedial action over the years. This resulted in providing a safer environment for employees and increased profitability. Other pipelines have now had to incur an added cost to improve their safety.

“We are long term owners of infrastructure assets. Considering ESG in the management of these assets is crucial for enhancing their long term value.”

Suzanne Findlay (Investment Manager) AustralianSuper

Continuous improvement of existing assets

As many of the infrastructure assets in the portfolio were acquired at least a decade ago, it is important that our fund managers not only consider ESG issues in new investments, but also review existing assets.

One of our infrastructure managers has used detailed questionnaires based on the Global Reporting Initiative to analyse the impact of ESG issues for each of its 28 existing assets. This analysis and benchmarking across the assets has enabled the fund manager to:

  • improve the governance at each of the boards on which it sits;
  • arrange for four Australian airports to work together to develop market best practice health and safety processes based on practices from each of the airports;
  • measure the electricity and water usage and carbon emissions of each its assets on a regular basis. This enables the identification of energy savings for many assets.

These efficiencies show that material improvements can be made if ESG issues are considered and acted upon.

Climate change risks

AustralianSuper participated in the 2011 Mercer report on climate change scenarios and strategic asset allocation because asset allocation has been a significant contributor to the fund’s performance relative to peers. However, the asset allocation which has worked to date may not be appropriate in a world where the physical impacts of climate change affect assets in different ways.

The Mercer report identified infrastructure as a sector where climate change had significant potential to affect the returns of the fund, positively or negatively. This is because the impact of climate change on infrastructure assets is very dependent on the type and age of the asset and its location. As an example, the management of an airport located close to the sea and in an area expected to have an increase in the number of severe storms, will have to plan differently than the management of an airport located inland in a more benign environment.

To better understand the potential risks, AustralianSuper is working with an environmental engineering consultant to understand the possible physical impacts on its largest infrastructure assets in 2030 and 2050. We will then work with the fund managers and management at the companies to ensure decisions are made in the context what is expected in the future.