Carbon neutral by 2030: Member update 2023

Carbon emissions as at 30 June 2022

Since our 30 June 2021 measurement of carbon intensity⁶ at the Diversified (MySuper) option level (the portfolio), we have seen an approximate 20% reduction in carbon intensity.

Figure 1 below shows how we are tracking along our glide path to our 2025 interim target⁸ and 2030 end target.⁹ As at 30 June 2022, we have managed an approximately 20% reduction in carbon intensity, around 13% ahead of the required trajectory.

Figure 1: NGS Super glide path as at 30 June 2022

While the glide path looks linear, it should be noted that the transition to the low-carbon economy, including NGS’s own pathway, will not be linear. There will be ups and downs along the way, as many companies and industries may see an increase in carbon intensity as they develop more sustainable low-carbon operating models.

The carbon credit market is evolving. In our 2022 update we noted that first and foremost we will be looking to reach our targets without the use of carbon credits or offsets. However, as more research emerges, it becomes clear that there is a valid place for carbon credits as the world transitions to the low carbon economy — where these carbon credits are from credible projects and are accounted for in a robust way.

Carbon-positive investments are investments that can generate a return as well as negate or remove carbon from the atmosphere. These are things like carbon capture and storage (also known as carbon sequestration), direct air capture, land regeneration projects and timber or forestation projects. We continue to evaluate opportunities in these spaces.

It is important to understand the drivers of the reductions achieved, so we have completed an attribution analysis. The results are shown in Table 1 below.

What did we learn?

It is important to conduct scenario analysis while transitioning to a carbon-neutral investment portfolio because it can help to:

• identify key risk within the investment portfolio, allowing us to implement an action plan through either divestment or engagement and
• understand where opportunities lie to invest in the solutions for climate change — we want to invest in climate solutions.

As at 30 June 2022, we re-reviewed our scenario analysis on 3 scenarios available to NGS Super: Delayed Transition 2 degrees (Disorderly); Net Zero by 2050 (Orderly) and Nationally Determined Contributions (NDCs) (Hot House World). These scenarios are developed by the Network for Greening Financial System (NGFS) which align with integrated assessment models used by the Intergovernmental Panel on Climate Change (IPCC). The results look at the impact on value from 2022 through to 2050. This was completed for Australian shares, international shares, property, infrastructure, and private equity.

For Australian shares and international shares, the scenario analysis was completed on our portfolio as at 30 June 2022. For property, infrastructure, and private equity the 30 June 2022 scenario analysis was based on listed proxies using the same 3 scenarios.

You can find details of the 3 scenarios in the appendix at the end of this article.

We will outline our key findings and takeaways from the scenario analysis in the Fund's updated Task Force on Climate-Related Financial Disclosure report later in 2023.

If we have a company or investment that has high scope 1, 2 or 3 emissions, and we can see that they have a sound and realistic business plan to transition to the low-carbon economy within a timeframe deemed acceptable to the Fund (taking into consideration industry trends and the overall global target of net zero by 2050), we will take an engagement approach.

We will regularly meet with the relevant company and/or investment manager to ensure they are progressing with their transformation business plans while still delivering value to the Fund. NGS Super also leverages the deep engagement work performed by Australian Council of Superannuation Investors (ACSI) and Federated Hermes EOS which help us on ESG engagement with listed companies (both Australian and international equities).

NGS Super’s target of carbon neutral by 2030 is an ambitious one, and we are aware that not all those companies we invest in today may be net zero by this time. But we are willing to accept companies with some level of scope 1 and 2 emissions at 2030 and beyond provided they are genuinely transitioning to the low-carbon economy, pose no transition risk, and we are obtaining acceptable risk-adjusted returns from these investments.

At 2030 we envisage that we will have investments that:

• have low or justifiable scope 1 and 2 emissions
• are carbon-neutral or
• are carbon-positive, offsetting those investments within the portfolio at point (1).

In our 2022 update, we noted that we were starting our divestment assessment and program. Effective 30 June 2022, we expanded our exclusions to include companies in the oil and gas exploration and production sector.¹⁰ This means that we restrict any holdings with companies:

• that generate more than 30% of their revenue from the distribution, power generation, or extraction of thermal coal or
• who are in the oil and gas production and exploration sector.¹¹

It is important to note that while our exclusion position does not cover every company involved in oil and gas exploration and production, it focuses on those businesses for whom those activities are focused on upstream oil and gas operations — bringing with it more risk of value destruction (stranded asset risk).

Have these divestments affected investment returns?

In short, no. We have in fact reduced our portfolio’s exposure to climate change transition risk.

On the performance side, Figure 2 below illustrates the performance of the following key indices from 30 June 2022 to 31 December 2022:

• ASX300
• ASX300 less the companies on NGS Super’s exclusion list
• The NGS Australian equity sector.

Figure 2: ASX300 and NGS Super AEQ performance from 30 June 2022

On the risk side, Figures 3 and 4 below show that under our selected scenarios, the NGS Super Australian and international equities portfolios are much less sensitive to valuation adjustments if we were to see these climate scenarios play out. This provides evidence that the actions taken around our exclusions have reduced the portfolio’s exposure to stranded asset risk.

Figure 3: NGS Super Australian Shares portfolio versus selected scenarios.

Figure 4: NGS Super International Shares portfolio versus selected scenarios.

We have been seeking out what we deem to be carbon-positive (see above) and low-carbon investments within our portfolio, and we will continue to do so. Carbon-positive investments are investments in things like carbon capture and storage (also known as carbon sequestration) and timber or forestation projects.

Low-emission investments are investments that promote solutions for the transition to the low-carbon economy. Examples include (but are not limited to):

• renewable energy generation and distribution
• low-carbon energy generation and storage
• green bonds (financing initiatives to combat climate change).

Here is a snapshot on the positive impact investments made in the 2021 calendar year. The 2022 snapshot will be released soon.

NDCs (2.6 degrees) — Hot House World

NDCs includes all pledged policies even if not yet implemented.

This scenario assumes that the moderate and heterogeneous climate ambition reflected in the conditional NDCs at the beginning of 2021 continues over the 21st century (low transition risks). Emissions decline but lead nonetheless to 2.6 degrees Celsius of warming associated with moderate to severe physical risks. Transition risks are relatively low.¹⁰

Delayed Transition (1.6 degrees) — Disorderly Transition

Delayed Transition assumes global annual emissions do not decrease until 2030. Strong policies are then needed to limit warming to below 2 degrees Celsius. Negative emissions are limited.

This scenario assumes new climate policies are not introduced until 2030 and the level of action differs across countries and regions based on currently implemented policies, leading to a “fossil recovery” out of the economic crisis brought about by COVID-19. The availability of CDR technologies is assumed to be low pushing carbon prices higher than in Net Zero 2050. As a result, emissions exceed the carbon budget temporarily and decline more rapidly than in Well-below 2 degrees Celsius after 2030 to ensure a 67 % chance of limiting global warming to below 2 degrees Celsius. This leads to both higher transition and physical risks than the Net Zero 2050 and Below 2 degrees Celsius scenarios.¹¹

Net Zero by 2050 (1.4 degrees) — Orderly Transition

Net Zero 2050 is an ambitious scenario that limits global warming to 1.5 degrees Celsius through stringent climate policies and innovation, reaching net zero CO₂ emissions around 2050. Some jurisdictions such as the US, EU and Japan reach net zero for all greenhouse gases by this point.

This scenario assumes that ambitious climate policies are introduced immediately. CDR is used to accelerate the decarbonisation but kept to the minimum possible and broadly in line with sustainable levels of bioenergy production. Net CO₂ emissions reach zero around 2050, giving at least a 50% chance of limiting global warming to below 1.5 degrees Celsius by the end of the century, with no or low overshoot (greater than 0.1 degrees Celsius) of 1.5 degrees Celsius in earlier years. Physical risks are relatively low but transition risks are high.¹²

NGS Super carbon intensity calculation methodology