NGS Super Pty Ltd as Trustee of NGS Super has taken a large step in its journey to a carbon-neutral portfolio by 2030, with the recent divestment of the following companies involved in oil and gas exploration and production. Watch our Chief Investment Officer, Ben Squires, explaining the divestment below, download the media release, or read on for more details.
This divestment follows from the recent extension of NGS’s exclusion relating to climate change and environmental impacts. Until recently, this exclusion was limited to companies generating more than 30% of their revenue from the distribution, power generation or extraction of thermal coal. Acknowledging that oil and gas are also significant fossil fuels, we have extended the exclusion as follows.
Fossil fuels
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.
Following an assessment of stranded asset risk, a total of 86 companies have been added to our exclusion list, which means that future investments in these companies by NGS is currently prohibited. We have divested the companies among those 86 in which we previously held an investment, as listed above.
It is important to note that while our updated exclusion list does not cover every company involved in oil and gas exploration and production, it focuses on those businesses for whom those activities are a key part of their operations.
There is no denying that to solve climate change, we need to rapidly transition to energy sources that don’t emit carbon and methane into the atmosphere. We have taken the view that companies whose revenues rely on further oil and gas exploration and production are at risk of becoming stranded assets as the world decarbonises.
This divestment of approximately $191 million AUD (as at 31 May 2022) has been redistributed to other holdings within our equities portfolio.
See related article: Frasers Property’s Australian business a global well-being leader
Does this compromise returns?
In the long run, by divesting companies that are most exposed to stranded asset risk (because they are solely focused on upstream oil and gas production), we expect to generate higher returns from allocating capital elsewhere.
As the world increases the commercial application of green technology in transport, power production and manufacturing, demand for oil and gas is expected to gradually decline on or before 2040. This means that these companies either need to expand their revenue streams into other activities or aim to produce at a low cost as competition increases to produce more oil/gas. Of course, this depends on the pace of emissions reduction and targets/commitments being met by countries, as well as the momentum in green technological developments, future commodity prices, and prices set on carbon emissions.
It is also worth noting that our Investments team views the tracking error resulting from this exclusion as manageable, because the sector is not significant in Australian and international equity benchmarks. That is, our ability to track the returns of these benchmarks is unlikely to be detrimentally affected by the exclusions. We will continue to measure the tracking error each year to ensure that these assumptions hold. At all times we will base our decisions on members’ best financial interest.
We understand that there may short-term rallies in oil prices and share prices/earnings of upstream oil and gas companies, as a result of geo-political tensions, supply chain constraints, significant increases in demand, or underinvestment in fossil-fuel extraction. The war in Ukraine is a prime example of all these factors coming together and leading to a rally in this sector. The NGS Investments team does take this into account when constructing portfolios and communicating with investment managers, to make sure we participate in these rallies via other proxies in the portfolio. In addition, current and ongoing research projects which study the historical economic events giving rise to these short-term rallies, has identified mechanisms which enable the Fund to engineer a similar outcome by having allocations to other equities and/or other asset classes that are expected to behave similarly.
Are there ever exceptions to the exclusion?
Yes, the Trustee can consider and apply exemptions to this exclusion. Currently, we have an exemption approved for AGL Energy Ltd (AGL). You can read about our views on AGL here.
Additionally, if a company makes significant improvements according to our assessment (see the factors we consider below), we can take them off the exclusion list and invest.
Will there be further divestments?
It is highly likely that there will be more divestments as we progress towards our 2025 interim target and our end target of 2030 for a carbon-neutral investment portfolio. However, these divestments are likely to be selective rather than industry-specific.
A key pillar of our transition is engagement. We will engage with companies who have high scope 1, 2 and 3 emissions to influence these companies to:
- set science-based targets and commit to meaningful scope 1, 2 and 3 emission reductions
- assess and challenge the plans they have in place to meet the science-based targets
- ensure they have contemplated appropriate adjustments to their business model as we head towards the low-carbon economy.
Where it becomes clear that a business is not equipped to transition to the low-carbon economy, we will consider divestment. Any company that we decide must be divested will then be added to our exclusion list.
Source: NGS Super