Future Fund s Approach to Climate Risk Joel Posters Head of ESG IFSWF Climate Change Session 3 May 15, 2017
About the Future Fund Future Fund key characteristics A sovereign wealth fund established in 2006 responsible for investing for the benefit of future generations of Australians. Maximize returns over the long term 10 year rolling periods Future Fund asset allocation at 31 March 2017 Value of the Future Fund at 31 st of March 2017: $129.6 bln Universal investor - across asset classes and geographies Targeting a return of CPI+4 to 5% pa with acceptable but not excessive levels of risk. Closed fund no member contributions Mandatory use of investment managers for investment execution Approximately 100 external managers globally. Confidential 2
Core ESG beliefs ESG issues can negatively and positively impact investment returns. These impacts can be material especially over the long term. By integrating ESG issues into the Fund s investment framework we will improve the riskadjusted returns earned on the Funds. By using its influence to enhance ESG performance at the entities in which it invests, the Future Fund is able to create investment value. Climate risk approach Climate risk is considered through an investment lens i.e. focus on integration in investment frameworks and the manager selection process develop insight into material carbon risk in our portfolio our managers should take carbon risk into consideration when making investment decisions be rewarded for the risks we incur exercise our ownership rights on ESG and climate resolutions in line with our long term investment horizon engage with investee entities on their approach to climate risk where we consider this risk material and not adequately addressed invest in climate friendly investments in line with our investment mandate. Powering Australian Renewables Fund Confidential 3
Integrating ESG in the investment process Internal frameworks ensuring our investment decisions accurately reflect carbon risk Integration of ESG considerations into investment decision making (i.e. investment structures, delegation frameworks, transaction templates) Sample due diligence questions (non-extractives) Carbon pricing - The expected carbon price, if any, over the investment horizon as well as an extended investment horizon applicable during the eventual sale process. (scenario analysis is useful to offer a plausible range of outcomes). Regulatory risk - The risk of domestic regulatory activity which could impact asset investment fundamentals, market supply/demand dynamics (e.g. carbon tax, more stringent environmental approval processes). Market risk - Impacts to demand by key customers or supply chains (e.g. due to international climate agreements, changes in customer preferences, societal expectations). Concentration/Counterparty risk - The impact of carbon risk to the viability of ongoing operations. The ability of the asset to shift revenue streams away from (carbon) vulnerable revenue drivers. Physical risk/resilience - Potential physical impacts to the asset from increased extreme weather events over time (e.g. storm surges, flooding, drought), and the resultant impact on asset performance. Technology risk the potential for elements of asset operations to change with advances in climate related technologies. Financial market efficiency - The extent to which the market is pricing in the expected climate risk. Confidential 4
Partnership with investment managers Structural ESG reviews for all investment managers where ESG issues could be material, climate risk is a key element. Supported by third party portfolio research into carbon risk. Ongoing engagement on issues of interest (e.g. stranded assets) Integrated as qualitative overlay in standard manager selection process Alignment on proxy voting on ESG/climate resolutions at Australian AGMs. Confidential 5
Active Ownership Proxy Voting: The Future Fund votes all its shares according to its internal corporate governance principles. Climate change shareholder resolutions not one size fits all voting decisions driven by materiality Send consistent messages ( one-face ) to the investee entity. Monitoring our investment managers voting behavior internationally. Engagement: Future Fund conducts direct engagement with ASX company boards on ESG/climate risk issues Key challenges / work in progress Other asset classes, investment styles Data quality and relevance Reporting. Aligning materiality with stakeholder expectations and market developments. (e.g. FSB TCFD) Looking past uncertainty. Confidential 6