In from day one: UniSuper articulates ESG evolution
Australia’s first green bond was spawned when UniSuper approached World Bank offering a cornerstone bid if the issuer mandated such a transaction in the local market. Managers from the superannuation fund share perspectives on what motivated it to spearhead the local labelled bond market and how its environmental, social and governance investment strategy has evolved since.
What motivated UniSuper to reach out to World Bank in the first place? How did this engagement process unfold?
COLOSIMO At the time, green bonds were emerging globally but no-one had taken the initiative to issue an Australian dollar green bond. Nick Footner, who was UniSuper’s head of fixed interest and cash, saw an opportunity to provide something unique for our members who had made the choice to invest in UniSuper’s sustainable balanced option.
Until this point, fixed-interest exposure was purely managed on an exclusion basis – tobacco, weapons, gambling, alcohol and fossil fuels. Nick recognised that green bonds could create an opportunity for an exposure to have some positive impact.
We knew World Bank had an existing green-bond programme globally and it was already proactively engaging Australian investors. I had already met Heike Reichelt, World Bank’s head of investor relations and sustainable finance, on one of her many trips to Australia. It was therefore the obvious first choice to issue the first Australian dollar green bond.
Nick approached World Bank to see if it would be interested. Subsequently, UniSuper was able to provide a cornerstone bid of A$100 million (US$66 million) and knowing there was a firm bid ensured the success of the transaction.
How has the labelled market evolved over the past decade compared with what you might have anticipated when the first deal was done?
COLOSIMO It is hard to think back 10 years, but I don’t think I anticipated such strong growth in social bonds, sustainability bonds and sustainability-linked bonds (SLBs). I had hoped for a greater range of issuer types, particularly a larger corporate green-bond market.
It is true that green bonds and sustainability bonds with predominately green asset pools dominate green, social and sustainability (GSS) bond supply in Australia, while labelled issuance is most common in the high-grade sector. Is the level of supply enough to make a functional asset class?
COLOSIMO We do not see a need for diversification into other assets or labelled bonds but we would like to see diversification across the type and rating of issuers. The Australian market is heavily dominated by government and supranational issuers. We would love to see more corporates.
It feels that we have had a few false starts: at one point, all four of the Australian major banks had issued a green bond, but there has not been any follow through. Some issuers have left the market, which is unfortunate.
Could Australia’s first sovereign green bond have a positive impact on the local market from a leadership perspective?
COLOSIMO I genuinely feel World Bank’s bond opened the door to the Australian dollar green-bond market. It was pivotal, and at UniSuper we are proud of the role we played in the transaction. I think the Australian sovereign green bond is an important step but I’m not sure it will be as pivotal as World Bank’s green bond.
The local market has developed to include social and sustainability bonds, as well as SLBs. There has also been a push among some investors toward a holistic view of environment, social and governance (ESG) considerations that may make labelling bonds less important. How does UniSuper think about labelled issuance?
COLOSIMO Labelled bonds sit within our green-bond portfolio – which is named after its heritage but also includes social bonds, sustainability bonds and SLBs as these markets have developed. This portfolio sits within our sustainable balanced option.
We prefer labelled issuance within this portfolio – but it is the only UniSuper portfolio with an explicit preference. We also have fixed-interest portfolios in our mainstream options that do not have an explicit preference for labelled bonds over unlabelled bonds, but we can and do invest in labelled bonds in these options.
In these portfolios, issuers’ ESG considerations are assessed alongside their creditworthiness, the structure and documentation of the transaction, and whether the spread is sufficient for the credit risk.
Overall, the strategy of the fund is a little bifurcated. We have a strong preference for labelled bonds in one part of the fund, no preference in the other and an overall ESG integration approach.
Does this mean you don’t have a preference for either use-of-proceeds (UOP)-style labelled bond issuance or more holistic labels that consider the entire balance sheet’s activity?
COLOSIMO From my perspective, UniSuper’s green-bond portfolio has the scope to invest in unlabelled bonds as long as the issuer’s sole purpose is aligned with sustainability. It has not actually done so as yet but, in my mind, it depends on the issuer. World Bank is a perfect example of where we would not necessarily need a labelled bond given the sole purpose of the entity.
Governments engage in many social, sustainable and green activities but they also do activities that would not be consistent with member expectations for the sustainable balanced option. In this case, we are happy to invest in labelled issuance within our green-bond portfolio but a little more reticent to invest on the basis of the whole programme.
BARNS Our ESG due diligence always looks through two lenses. We look at the issuer and its general business activities as well as the type of projects the proceeds will be used for.
Where the green-bond portfolio differs is that there are also negative screens the issuer itself needs to meet, regardless of the UOP. We do a bottom-up analysis: would our members reasonably expect to see this issuer’s name in the green-bond portfolio, and does it meet our negative screens? These principles for inclusion apply to debt and equity investments.
To include an unlabelled transaction from an issuer that has a sole purpose that is aligned with sustainability in our green-bond portfolio, we would need to go about our due diligence in a slightly different way. If a bond is labelled and there is clear UOP to specific projects and detailed reporting, it can move through the checks and due diligence in a linear fashion.
In the case of a bond’s alignment being more holistic and based on the issuer’s activities, we would take the same bottom-up approach but might need to do something different to get comfortable with the proceeds compared with a labelled bond.
Does this mean there are cases where UniSuper cannot add GSS labelled bonds to its green-bond fund, based on there being part of the business that falls on the exclusion list?
BARNS Yes, in these circumstances the security would not be suitable for the sustainable balanced option. But it could potentially be an exposure we could participate in via the mainstream core options.
COLOSIMO There have been cases where we have green bonds in our mainstream credit portfolio that we have decided are not suitable for our green-bond portfolio.
Australia has a large transition task ahead but, at the same time, SLBs have failed to develop momentum and there is not a commonly used instrument for transition finance. Do you think labelled bonds can make a major contribution to directing capital to support transition?
BARNS Reporting and common definitions will be critical, and we are still developing these in Australia. The Australian Sustainable Finance Institute is in the process of developing a taxonomy that will help give guidance to what we should be defining as transition, because it is quite different in different jurisdictions and economies. What is a transition activity in Europe looks different from Korea, which is different from Australia.
What constitutes a transition activity is jurisdiction specific. Once we get a framework and architecture, the industry will have the guidance and guardrails it needs. This is being developed locally, and once we get this I think we can expect to see financial instruments like transition bonds.
Where would a transition bond sit in the context of how UniSuper makes its allocations for sustainable investment nowadays?
BARNS With the current exclusions we have – being fossil fuels, weapons, gaming, alcohol and tobacco – if a transition bond was related to fossil fuels it wouldn’t be able to be included in our sustainable balanced option but it could be in our core mainstream options. The reason we have these screens is that members who want this type of option do not want exposure to certain activities, and I think this would hold true.
How does UniSuper make impact in its fixed-income investments and how does it view its role in the climate transition?
BARNS Labelled bonds in fixed income allow us to see where capital is being allocated and what the impact is. This is specific to labelled bonds. For instance, in our sustainable labelled and environment branded options, we provide members with reporting on how these options have positive attributes attached – in fixed income and other asset classes.
On our role in the climate transition specifically, I believe our position as a superannuation fund is a great starting point to frame the conversation. Ultimately, our job is to achieve great retirement outcomes for members, which we do by being a responsible and prudent investor, and integrating ESG across all asset classes. This includes incorporating factors like climate change into our decision making where it is material and relevant.
We believe decarbonisation will be a core investment theme for the next decade. We can contribute to Australia’s 43 per cent reduction in emissions by 2030, which we do generally through company engagement, advocacy and by investing in companies that will lean into the net zero transition and provide a good return for our members.
How does end investors’ interest in and engagement with ESG inform your investment process, and what do you think it could look like into the future?
BARNS There is a fund-wide approach and then there are specific products. We take an active interest in the quality of our investments and in ESG considerations across all asset classes and across the entire fund.
Ultimately, ESG is a quality factor that helps us understand and assess the potential for companies to have longterm sustainable earnings. The quality of the integration piece is high at UniSuper. For instance, I work closely with David when we assess fixed-income assets, and this is the same for other asset classes.
On the trajectory of the sustainable or ESG labelled products, we launched the Sustainable High Growth fund in 2002, the Sustainable Balanced fund in 2008 and the Global Environmental Opportunities fund in 2012. These three sustainable and environmental options have circa A$15 billion in funds under management. They have grown considerably over time.
We were prescient, in 2002, to launch a product to lean into where we saw member interest and we have since added other products to diversify the risk appetite.
Meanwhile, Global Environmental Opportunities has a positive tilt to solving environmental challenges by investing in companies that provide solutions. We have always had demand for this type of investing, and I think it will hold true. There are two aspects: our fund-wide approach and the product-specific approach.
COLOSIMO In this context, it is important to keep in mind UniSuper’s heritage as the superannuation fund for the university sector. As a generalisation, our members may be more focused on environmental issues than the members of other industry funds. We have a natural inclination to be a leader in this space.
How would you assess the state of demand for sustainable investment in 2024, especially in the fixed-income sector?
BARNS I can’t go back 10 years and talk about whether we thought we would have the level of funds under management that we do in sustainable options, but I believe our funds under management demonstrates that we continue to experience demand.
Since the first green bond, the responsible investment market has continued to evolve and mature, and views about what ESG and responsible investment represent have also evolved. We always seek to keep pace with the changing landscape as well as being aligned with industry and regulatory standards as they emerge.
To what extent is growing regulatory scrutiny of greenwashing curtailing investors’ willingness to take a leadership role?
BARNS Evolving standards and regulatory scrutiny is front of mind, but I believe the architecture, sustainable finance strategies, common methodologies and clear frameworks being developed will alleviate concerns in the market and give confidence to drive further investment into these types of products.
Transition bonds are a good example: once we have a common definition and all know what we are working toward, this will allow the opportunity to step into the space.
We have always had good demand for sustainable products from our members, but what this represents has changed over time. Back in 2002, the idea of sustainable investing was very different. The first green bond didn’t come to market until 2014. We will always make sure we keep pace with changes, and we expect new standards to come to market and for expectations to continue to evolve.
