Carbon Neutral 2030 (CN2030) progress report as at 30 June 2023

Introduction

This section outlines how we calculate the scope 1 and 2 carbon intensity of our Diversified (MySuper) investment option hereafter referred to as “portfolio”. This is a technical document and is provided for the information of interested members to provide transparency.

In 2021, NGS Super (Fund) set a 2030 target for a carbon-neutral investment portfolio.¹⁴ This meant that we needed to complete a baseline measurement of the carbon intensity of the portfolio, and make the same measurement annually to understand our rate of decarbonisation and how we are tracking against both our 2030 end target and our 2025 interim target (a 35% reduction in carbon intensity based on 30 June 2021 levels).

From year to year, there will be amendments to the calculation methodology as we become more sophisticated in our calculation capabilities and as better information becomes available.

The measurement

Which emissions?

When the Fund calculates the carbon intensity of the investment portfolio, we are calculating the scope 1 and 2 emissions attributed. These are deemed in scope emissions. At this stage we are not considering scope 3 emissions as part of our carbon-neutral goal and therefore this measurement methodology does not consider scope 3 carbon emissions of the Fund’s investments, however, the stranded asset risk due to high scope 3 emissions is considered as part of our exclusions.

The unit of measurement

We acknowledge that there are 2 generally accepted methodologies to measure the carbon intensity, which are:

1. Intensity per $million invested: (scope 1 + scope 2 emissions) x $million invested / Enterprise Value Including Cash (EVIC), or
2. Intensity per sales: (scope 1 + scope 2 emissions) / $million in sales.

There are positives and negatives for both measurements. The Fund has adopted the first methodology as it allows us to compare our entire portfolio, which is invested in diverse asset types.

The Fund defines carbon intensity as the tonnes (t) of carbon dioxide (CO2) equivalent per million dollars (AUD) invested and displays this as tCO2e¹⁵/$million invested (AUD).

This can also be referred to as “financed emissions”, which are the indirect greenhouse gas emissions attributable to The Fund as a financial institution due to its involvement in providing capital or financing to the original emitter.

Acknowledging the data challenges

While climate change isn’t a new investment risk, the data we need to measure carbon intensity is emerging. For The Fund to measure the carbon intensity of its portfolio, we need access to the scope 1 and 2 carbon emissions of the investments within our portfolio. For listed companies, The Fund mainly relies on carbon emissions data provided by the Fund’s ESG data provider.

Scope 1 and 2 emissions from our investments are not always available. Therefore, estimation will be required for companies and/or assets which do not report scope 1 and scope 2 emissions. Our methodology is to accept the scope 1 and 2 emissions reported by the company/investment in the first instance, and only apply estimates where there is no reported figure as at the estimation date. We also take the last reported figure available at the time of performing the calculation.

As soon as investment and/or asset reported scope 1 and 2 emissions data becomes available, we will include these in subsequent calculations, overriding any prior estimation. We acknowledge that this may artificially inflate or deflate our subsequent calculations, depending on whether our previous estimation was over or understated. However, we acknowledge that data perfection is not possible and do not consider that an excuse for inaction. It is also inappropriate to exclude investments that don’t report scope 1 and scope 2 emissions from our overall calculation as this is not a fair representation of these emissions within the investment portfolio.

Transition path and emissions attribution

Given the data challenge, coupled with the transition trajectories of certain high-emission but vital sectors, we acknowledge that both our transition and the overarching economic transition to the low-carbon economy will not be linear. We do not expect a neat year-on-year reduction in our portfolio emissions or those of our investee companies as we head towards our 2030 target. For some sectors in the economy, it may take longer for emissions to fall, or they may even rise in the short term, due to the technological innovation and transition required to enable those sectors to operate in the low-carbon economy.

Given we adopt the ‘Intensity per $million invested’ methodology, we acknowledge that this carbon intensity measure is subject to market volatility. A company may be reducing its emissions, but if the value of the company falls significantly due to adverse market movements, then the carbon intensity measure will increase.

We will investigate and interrogate outliers in terms of increased carbon intensity to ensure that the increase is justifiable and for the greater good in transitioning to the low-carbon economy.

Each year, we undertake an attribution of any reduction or increase in the NGS financed emissions to understand their drivers. This provides us with the opportunity to take action.

What is included in our calculation?

Almost all of the Fund’s investments within the portfolio as at the calculation date (30 June) each year is deemed ‘in scope’. This includes co-investments.

However, not all investments report their actual scope 1 and 2 emissions. NGS and/or any appointed data provider may apply estimates for investments that:

• have not reported scope 1 and 2 emissions data
• are deemed immaterial (in terms of value).

For portfolios of listed securities, we estimated the portfolio’s emissions by taking the average of the investment managers’ holdings (every quarter end) over the year.¹⁶

Actual Asset Allocation (AAA) for MySuper Diversified as at 30 June 2023

The AAA for Diversified (MySuper) investment option as at 30 June 2023 (below) is used for the calculation of option’s carbon intensity.

What isn’t included in our calculation?

Cash and term deposits, Commodities, foreign exchange overlays, and derivatives outside Australian and International shares asset classes are deemed out of scope. The reason is that investment in these assets does not involve physical processes or industrial activities that release greenhouse gases.

The table below provides a summary of the Fund’s asset classes/sectors and whether they are included in the carbon intensity calculation for the Diversified (MySuper) investment option and illustrates the percentage of the calculations based on reported data and estimates.

Australian Shares, International Shares and Corporate Bonds (Fixed Income), Listed Property and Listed Infrastructure

Calculation methodology

The Fund subscribes to carbon data from and ESG data provider and uses this data and associated methodology to calculate the carbon intensity of the Australian shares, international shares and corporate bond portfolios. The ESG data provider classifies carbon emissions per Greenhouse Gas (GHG) Protocol.

We use enterprise value including cash, i.e., market capitalisation (market cap) plus both short and long-term debts as the calculation basis. As mentioned earlier, an ESG data provider is used to source emissions data. Bloomberg and RIMES are used to source market cap and debt data in order to calculate the tCO2e/$million invested (AUD).

Estimates and proxies

Where companies report their scope 1 and 2 emissions, the ESG data provider will reflect that reported company data in the system. It should be noted that there are many protocols (audited and unaudited) for companies to use to calculate their scope 1 and 2 emissions. The ESG data provider will report what company has reported first and foremost. We acknowledge that this lacks consistency, but it is the industry norm.

Where companies do not report their emissions, the ESG data provider performs estimation based upon several models developed by the ESG data provider’s research team. The ESG data provider’s estimation allows for use of three models, choosing the best model for the disclosed data available. The three models are:

• Production model – mainly used for power-generating utilities
• Company-specific intensity model – used where there is past reported emissions data (but not data available for all years)
• Industry segment-specific model – used for other companies and involves determining a company’s emissions based on other companies within their segment.

When emissions data for a company was missing from the ESG data provider’s data, the average intensity for the company’s sub-industry was used. Outliers were omitted for the purposes of calculating industry averages for the Australian, international shares and corporate bonds sectors.

An outlier was defined as any emission datapoint that was larger than the 3rd quartile of emissions for the sub-industry plus 1.5 times the interquartile range.

For the Australian and international share sectors, where there was a derivative based on an equity index, the notional equivalent in the underlying company holdings was used.

For example, a swap on $100 million notional of the ASX50 TR Index is replaced with the weighted holdings in the 50 underlying stocks for the purposes of the emissions calculation.

Infrastructure and Property (unlisted)

Calculation methodology

For financial year 2023 calculation, the Fund sources scope 1 and scope 2 of its in-scope private or unlisted assets directly from investment managers and/or asset and where this is not available, we apply estimates as outlined in previous “What is included in our calculation?” section of this document.

We acknowledge that each investment manager or asset operator will have its own methodology or process to calculate scope 1 and scope 2 emissions which introduces data variability. This is a known limitation to the methodology.

Estimates and proxies

Where investment managers and/or asset operators were unable to provide scope 1 and scope 2 data, the Fund will apply an estimate. There are three agreed methods for applying estimates within the unlisted portfolio:

1. For assets with like characteristics (i.e. airport v airport), the basis for the estimates applied can be based on other like assets (with reported data) within the portfolio.
2. If there are no like or comparable assets within the reported data, or the reported data is deemed flawed, sector averages can be applied to the investments/assets.
3. When no accurate fit between assets in the portfolio is found, a listed proxy is used.

Note: “Flawed” data in this context suggests that there are discrepancies in the emissions data, which do not align with reported figures or the known characteristics of the asset/ sector.

In the Fund working files for each calculation, we record the details of the estimate basis used.

Private equity and Bond alternatives

For private equity’s carbon intensity calculation, we are using look-through information provided by our custodian bank to estimate/proxy emissions. Specifically, our custodian conducts analysis to identify the listed equivalent sub-industry for each asset; from there, we will use the sub-industry average number for carbon emission proxy of that particular asset.

Methodology changes since the last reported carbon intensity figure

30 June 2021 was the baseline carbon intensity calculation.

Each year investments may fluctuate between having reported figures and unreported figures where estimates or proxies need to be applied by the Fund, and/or a data provider. These changes are not considered to be a change in methodology.

Changes to calculation methodology from 2022 to 2023

From 2022 to 2023, there are three main changes to our calculation methodology which were discussed throughout the paper. Firstly, we use average Australian and international equity managers’ holdings throughout the year to estimate their carbon intensity. Secondly, we use custodian provided look-through information for estimating carbon emissions for private equity and bond alternatives. Finally, we utilize the actual asset allocation as at 30 June, instead of the dynamic asset allocation, to calculate the carbon intensity of the Diversified (My Super) option.