Our position on climate change

Hostplus’ primary duty is to optimise retirement outcomes for our members. This duty guides every decision Hostplus makes. At the same time, Hostplus recognises that climate change is one of the biggest challenges facing the world today, and can pose a material, direct and current financial risk that is relevant to Hostplus' investment strategy, governance and the management of our investment portfolio on behalf of members.

In particular, Hostplus recognises that climate-related risk presents itself in many ways, including physical risk (such as damage to assets and property particularly from more severe weather events), transitional risk (which could include risks associated with financial and regulatory adjustments as a result of climate mitigation policies), and litigation risk.

These risks can impact the performance of our investment portfolios including through changes to asset values or revenue, and costs arising from regulatory changes as the world transitions to a low carbon economy.

Hostplus takes climate change and its associated risks very seriously and has implemented the following systems, policies and processes to ensure that consideration of climate-related financial risks is embedded in operational and reporting frameworks across the fund.

In order to manage the financial risks of climate change, we incorporate climate change into all aspects of the investment process. We do this through:

Investment Philosophy, Investment Strategy and Strategic Asset Allocation

We incorporate climate-related financial risk into Hostplus’ Investment Philosophy. The Investment Philosophy is a key document within Hostplus’ Investment Policies and Procedures Statement, which forms an integral part of the investment governance framework and the Investment Philosophy is the basis of investment decision making. Specifically, with respect to climate change, the Investment Philosophy states “The Trustee recognises that climate change may influence the performance of the Fund’s investments over time and that the impact will be dependent on the extent of physical, social and regulatory changes. The Trustee recognises that it must manage the financial risk due to climate change in our portfolio by incorporating climate change into all aspects of the investment process”. Hostplus and its investment adviser also consider climate-related risks as part of the investment strategy, including the strategic asset allocation, as a structural thematic alongside a range of other risks. Hostplus’ Board reviews and approves the investment strategy, which guides investment allocation decisions, annually, at minimum.

Risk Framework

We embed climate-related risks within our internal risk framework, recognising that climate change has the potential to impact Hostplus and its members by way of financial, physical, transitional, regulatory, member retention and reputational risks. The Hostplus CIO oversees climate-related risk, which based upon the current risk level, must be considered and assessed at least every 6 months. The Board is responsible for setting Hostplus’ risk appetite. If a risk is outside of the risk appetite, the Board is responsible for either accepting the risk or requesting additional controls. Controls have been put in place to mitigate and manage climate-related risks. These include incorporation of climate-related risk within the Investment Philosophy, incorporation of climate-related risk within investment strategy (including the strategic asset allocation process), conduct of climate change stress testing and scenario analysis, assessment of investment manager climate change risk management capabilities, and engagement with investee companies regarding climate change risk assessment, management and disclosure.

Stress Testing of Investment Options

In connection with our investment governance framework, we determine the overall investment profile for our investment options based on a range of factors, including climate change stress testing and scenario analysis, in accordance with the Hostplus Stress Testing Policy. This process occurs annually, at minimum, as part of the review and approval of the investment strategy by the Board. As part of this analysis, and consistent with the recommendation of the Task Force on Climate-related Disclosures (TCFD), we currently consider and report to the Board on two climate change scenarios - the IEA Sustainable Development Scenario (which has a 66% probability of limiting long-term global average temperature rise to 1.8^oC by 2100) and the IEA Stated Policies Scenario (which represents announced policies and has a 66% probability of limiting temperature rise to 3.2^oC). Our stress testing scenarios and parameters are subject to annual review. These scenarios help us to quantify potential impacts to performance associated with greater transition and physical risk, respectively.

Selection and Review of Investment Managers

Based on advice from our investment adviser and internal investment team, Hostplus’ Board is responsible for the appointment of specialist external investment managers that manage the underlying investments. Hostplus' internal investment team and investment adviser subsequently undertake regular monitoring of investment managers’ progress. Part of the manager selection and review process involves assessing the climate change risk management capabilities of each investment manager, which are reported to the Board annually through an ESG Review.

Monitoring Investment Portfolio

We continually monitor our investment portfolios and use external providers to advise on the ESG and climate change risks in our portfolio. Through our investment adviser, we monitor the equities portfolio ESG scores, carbon emissions and climate risk. We also use the service provider, Trucost, to measure the carbon emissions of our equities portfolio.

Reporting

In our 2020 Annual Report we committed to using the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, to report our management of climate change risks, commencing in the 2020-21 financial year and we recently appointed specialist service provider, Trucost, to assist in calculating the carbon footprint of our investment portfolio. As a signatory to the United Nations supported Principles of Responsible Investment, Hostplus complied with the requirement to report to the PRI, TCFD-based information on climate change, including climate risk assessment within investment policies and strategies, governance and oversight over climate risk, and scenario analysis and modelling. We also expect the companies in which we invest to disclose climate change risks in accordance with the TCFD, as advocated by our engagement service providers.

Hostplus’ Board has ultimate responsibility for oversight of Hostplus investment decisions, including oversight of management of the financial risks due to climate change. The Board follows an investment approach that is in accordance with Hostplus’ investment governance framework. Management of climate-related financial risk is embedded in the framework, including through the Investment Philosophy, Responsible Investment Policy, Stress Testing Policy and investment strategy process. Through a combination of these processes, the Hostplus Board has considered or noted climate change matters as part of five out of seven board meetings held during calendar year 2020.

Hostplus invests wholly through specialist external investment managers as we believe this model not only provides great value for Hostplus members but also gives them access to the skills and expertise of some of the best investment managers in the world. We work closely with our investment consultant, JANA, to select and monitor our external investment managers. While the approach to ESG integration may vary by manager, each manager's ESG capabilities must be in line with that of their asset class peer group at a minimum for inclusion in the portfolio.

Hostplus has concluded that it is not in the financial best interests of our members to apply a blanket ban on any exposure to fossil fuels in our Fund. However, we are keenly aware of the impact of fossil fuels in exacerbating global climate change. For that reason, climate change is a key consideration taken into account by Hostplus and our investment managers when applying our investment decision frameworks as described above.

Any investment in a particular company, asset or sector that is heavily exposed to or reliant upon fossil fuels is likely to be assessed as higher risk. This could be due to likely future regulatory changes and market shifts away from the use of fossil fuels, among other factors. We rely upon our rigorous investment process, which includes external investment managers considering climate-related risk as one of a range of factors, to determine decisions about the selection, retention or realisation of Hostplus’ investments across the portfolio.

Where we are invested in a company within the fossil fuel industry, Hostplus uses its influence as a shareholder to create change within these companies by encouraging and supporting an orderly transition to a low carbon economy.

Hostplus pursues an active ownership program and engages with companies both directly and through specialist service providers, the Australian Council of Superannuation Investors (ACSI) and Hermes EOS. This involves meeting the company Boards and management. Our engagement focuses on understanding and analysing how companies are strategically responding to climate change and their capacity to transition to a low carbon environment. By taking a collective engagement approach, Hostplus can exert greater influence beyond our own shareholding in an investee company and manage resources more effectively.

We have found this engagement to be a highly effective. During the past financial year, we engaged with 189 companies, either directly or through the Australian Council of Superannuation Investors, of which we are an active member. Pleasingly, 18 out of 20 target companies have made improvements with respect to their disclosure of climate change risks and opportunities. By way of two examples, Hostplus' engagement has significantly contributed to the following outcomes:

Rio Tinto

Subsequent to ongoing engagement, Rio Tinto released a TCFD (Climate Change) report which assessed how the business is strategically placed for a low carbon transition - by including a well-below 2 degree scenario as well as physical risk analysis and an industry-associations review. Rio Tinto has also exited from coal assets and has indicated it is likely to consider a 1.5 degree climate change scenario this year.

BHP

ACSI has engaged with BHP on the issue of industry organisations since 2015. BHP is a member of a number of industry organisations, which it could be argued have a different position on climate change than its own, including Coal21. ACSI raised with BHP concern regarding Coal21’s campaign aimed at “enhancing the public standing and reputation of Australia’s coal industry and Australian mining more generally”. In September 2019 in response to ASCI's engagement, BHP supported a constitutional amendment of Coal21 which confirms its research focus and limits any communication to technical matters only. At BHP’s subsequent AGM, Hostplus also supported a shareholder resolution which called on the company to suspend membership of industry organisations whose lobbying is inconsistent with the Paris Agreement.

When company oversight or practices are insufficient, that prompts us to take further action, which may include voting for climate related shareholder resolutions. We favour a pragmatic and commercial approach to voting at company AGMs that considers the specific circumstances of each company and proposal on a case-by-case basis. We aim to vote in all matters where it is practical and in our members’ financial best interests for us to do so. Our voting takes into consideration advice and voting recommendations received from ACSI and our investment managers. During 2020 we supported climate change shareholder resolutions at Santos and Woodside that, among other things, sought to require these companies to set short, medium and long term goals in line with the goals of the Paris Agreement and to review direct and indirect lobbying activities related to climate change.

Beyond incorporating climate change risk into our investment decisions and engaging with companies to encourage them to take action, we also invest in a range of climate solutions. As our Chief Investment Officer, Sam Sicilia, highlighted during his Annual Members’ Meeting address, we have put in place a roadmap of actions to ensure we are transitioning our portfolio to capitalise on sustainable opportunities without compromising the financial interests of our members, which is, of course, our number one priority.

As one of the largest Australian investors in venture capital, we invest in a range of assets that aim to change the world for the better - in areas including medical therapies, alternative food sources, collaborative tech, robotics and clean energy – while aiming to deliver future investment returns for our members.

Hostplus’ members are invested in companies and assets that are at the forefront of developing the technology and solutions we will need to transition to a low-carbon economy. These include:

Powering Australian Renewable Fund (PowAR)

PowAR aims to develop and own approximately 1,000 megawatts of large-scale renewable generation projects. The fund consists of four assets across wind energy and solar energy and will assist Australia’s transition to a more sustainable energy future.

Swift Solar

Swift Solar is a US start-up developing lightweight and flexible solar cells. They have invented new technology using a mineral called perovskite, which can be more efficient, more affordable, and more scalable than conventional solar technologies. The company is well-positioned to initially serve high-value markets such as aerospace, electric vehicles and telecommunications, and if successful, could ultimately provide the lowest-cost source of zero-carbon electricity in the world.

Commonwealth Fusion Systems (CFS)

CFS is a company developing a new generation of super conducting magnets, to be used in smaller more economical fusion reactors. Fusion energy, unlike fission energy used in conventional nuclear reactors, has the potential to produce clean, carbon emission free baseload power, without the by-product of long lived highly radioactive isotopes. It’s the same reaction as occurs in the production of the sun’s energy.

Rialto Bio Fuel

Rialto Bio Fuel is a resource recovery facility under construction in Rialto, California that will provide organic waste recycling and renewable energy generation to local government authorities and solid waste haulers, who are under regulatory requirement to divert organic waste from landfills in order to reduce greenhouse gas emissions. The facility will convert biosolids into a fertilizer product and organic waste into renewable natural gas for use as a carbon negative transportation fuel.

Terra-Gen

Terra-Gen is a vertically integrated US renewables platform, with a pipeline of late-stage development projects in addition to a mature portfolio of wind, solar, geothermal and battery storage assets primarily located in the California market. Terra-Gen currently operates over 1.6 gigawatts (GW) of facilities and has more than 3 GW of projects under development.

Wheelabrator

Wheelabrator is the largest pure-play energy-from-waste company in the UK. It owns and operates four energy-from-waste power plants and has three sites in advanced stages of development, which will provide a total electricity generation capacity increase of 143MW and waste processing capacity of 1,200,000 tonnes per annum.

Finerge

Finerge is Portugal’s second-largest renewable energy producer, operating 53 Wind Farms and 16 PV solar plants. More than 700 turbines harness the energy of the wind, and thousands of photovoltaic modules collect energy from the sun, transforming it into 3,100 TWh of clean electricity annually and avoiding more than 1.8 million tonnes of CO2 emissions.

Climate change risk management is part of our responsible investment approach for all investment options. But for members whose preference is to avoid investments in fossil fuels, we offer a Socially Responsible Investment (SRI) option. The fossil fuel exclusions in our SRI option have been progressively tightened over time.

From 1 January 2021, the option will avoid investing in all companies that mine, produce or generate energy from fossil fuels, as well as those that receive more than 10% of revenue from servicing the sector.

For more information, refer to our Socially Responsible Investment (SRI) – Balanced option.

We have also listened to the results of a survey of more than 3,000 of our members regarding their preferences for the SRI option and will be releasing a significantly updated and improved option in the first quarter of 2021. The option will:

• Exclude a range of industries (fossil fuels, companies that breach human rights or labour rights standards, companies with very poor ESG policies and systems, controversial weapons, uncertified palm oil, predatory lending, for profit immigration detention, gambling, tobacco production and live animal exports).
• Focus on investing in companies and assets that contribute toward positive social and environmental outcomes aligned to the Sustainable Development Goals (e.g. green buildings, renewable energy, community infrastructure, essential water infrastructure, green bonds, medical solutions and alternative foods).

Hostplus is a signatory to the United Nations-supported Principles for Responsible Investment (PRI) and is proud to have last year achieved an A+ rating for our Responsible Investment Strategy and Governance from the PRI. Responsible investment, which involves incorporating environmental, social and governance factors into investment decisions and active ownership, helps Hostplus manage risk and optimise retirement outcomes for its members. Hostplus’ Responsible Investment Policy outlines the principles that direct Hostplus’ approach to responsible investment. The Policy is reviewed on an annual basis by Hostplus Management, in line with Hostplus’ strategic review process. Any changes that are required to be made to the Policy are referred to the Hostplus Board for approval.

Hostplus recognises that the management of climate-related risk is a rapidly evolving area, which requires continual review and advancement. For this reason, Hostplus has implemented a commitment to review its approach to climate-related risk management on an annual basis and to report the results of the review to the Board through the ESG Review.

As we said at our most recent Annual Members’ Meeting last December, we are actively considering a net zero emissions target as part of the review of Hostplus' approach to climate-related risk management that has been substantively under way for a number of months.

In addition, we note that APRA has flagged its intention to develop a new prudential practice guide which will aim to assist regulated entities to prepare for climate risks and clarify regulatory expectations in respect of the management of those risks. Hostplus welcomes the preparation of this guidance and intends to review and adopt new guidance as and when this becomes available.

We look forward to updating our members, and the broader community, on our climate change strategy and related actions in the near future.