State Super: Developing an ESG risk dashboard

State Super is committed to promoting the integration of material ESG issues into investment analysis and decision-making in addition to active stewardship practices.

Its portfolio risk and responsible investment teams collaborated to develop an internal dashboard – the State Super ESG Risk Dashboard – that captures ESG data together with portfolio risk metrics. The superannuation Trustee developed this product to consolidate and more effectively use the underlying data to which it has access, and to ensure it captures climate and ESG risks in the same way as it captures other portfolio risks. The tool allows the Trustee to holistically assess its pooled fund portfolio exposure, map carbon metrics and its trajectory towards net-zero targets, as well as drill down into each manager and company to understand the risk exposure. The investment team has access to this tool, which is used on a whole-portfolio level as well as in individual manager engagements.

This integrated tool measures and shows transition and physical climate change risks and ESG exposures for State Super’s listed equity portfolio in an interactive dashboard, leveraging its portfolio risk metrics. The Trustee is working on expanding this tool to other asset classes as data continues to become available.

Why this approach?

As part of State Super’s commitment to systematic ESG integration, it has developed a dashboard that provides access to ESG and other risk metrics in the one tool. While most asset owners use ESG and climate data for listed equities, the incorporation of these by State Super into an interactive dashboard means they are readily accessible by the investment team at any time to facilitate oversight and discussions.

The tool combines ESG metrics from several data sources and providers, including carbon emission metrics and asset-specific physical risk metrics, with portfolio risk metrics. This provides a one-stop, holistic view of listed equities exposure and helps the Trustee manage these risks in a more efficient, sophisticated way.

The investment team is able to view performance across a variety of categories, for approximately 40 different metrics, including:

• Whole of portfolio;
• International equities;
• Australian equities;
• Individual mandates; and
• Company level.

Integration in mandates

One use of the tool is in State Super’s manager reviews, allowing its analysts to view the ESG metrics for the mandate and drill down into specific companies that are highly exposed in particular areas. It has used the tool to discuss stock-specific positions with its investment managers. A trend oversight function available via the tool also helps to facilitate discussions on the overall carbon-intensity trajectory of the mandate and monitor how this tracks over time relative to the benchmark.

In a specific example, State Super engaged directly with a high-emitting company as a result of viewing its exposure. In another example, it engaged with a manager regarding a high-emitting company held in the portfolio which the manager subsequently divested of due, in part, to the overall carbon risk it represented.

Priorities based on risk

Importantly, the tool allows State Super to integrate carbon-intensity exposure with marginal value at risk, which allows it to see the highest-risk carbon exposures in its portfolio, information which can subsequently be used to facilitate its engagement efforts. The implementation of the dashboard has allowed it to manage ESG risk, and particularly climate risk, across the portfolio, enabling the Trustee to systemically identify its highest areas of exposure and then manage those on a pooled fund, sector or manager basis. Furthermore, it can monitor each mandate’s carbon emissions over time and track its progress towards a 2050 carbon-neutrality target.

What were the outcomes and challenges? And what are the next steps?

The tool has improved State Super’s ability to integrate ESG into its investment decisions and proves useful when prioritising its engagement efforts, ensuring that it focuses its efforts based on contribution to portfolio risk. Through these methods, it is able to channel its internal resources more effectively. For example, it has refined the way it prioritises its voting and engagement practices based on high ESG risk and contribution to portfolio risk.

At this stage, the tool is used for State Super’s listed equities (its biggest asset class), but it plans to expand its use to other asset classes. While there were no material challenges in implementing the tool, there were some questions regarding how the Trustee could better use data sources that translate into investment outcomes.

By integrating risk and ESG metrics, it has been able to monitor its climate and ESG risk exposure, as well as reduce Scope 1 and 2 emissions. Its engagement efforts are more focused, and it has been able to monitor and test its active managers’ investment decisions. These have been some clear benefits to its risk management process, which has enabled far better oversight.

One challenge has been how State Super measures and incorporates the underlying facility data for physical risk. While this information is useful in highlighting areas of exposure on a global basis, there have been challenges in translating these facility-level results to investment decisions and demonstrating the nexus with financial returns. State Super aims to address these challenges by expanding the metrics it uses and incorporating a climate value-at-risk metric.

Another challenge is that there are data limitations in other asset classes that will make it more difficult to apply the process. More specifically, unlisted real assets and some investments within the fixed interest and credit segment have greater limitations around ESG data availability and transparency. State Super is in the process of surveying the managers of its real assets to collect some of this data and, while it will be more limited than the data available for listed equities, it will help bridge the gap and improve the oversight capability of the dashboard.