The Implemented Consultant’s (Mercer) ESG ratings reflect to what extent the appointed investment managers integrate ESG factors into their investment process. A 1 - 4 rating scale is applied, where 1 is the most integrated, which means a lower ESG rating is preferable. The following summary is a weighted average for the total UWA portfolio, drawing on the individual ratings for each underlying fund’s management strategy across asset classes.

• In 2021, the weighted average ESG rating of UWA’s total portfolio was 1.75, ‘outperforming’ the relevant Universe ESG rating of 2.15. The Universe is based on the aggregate ratings for all strategies in the relevant asset classes within Mercer’s Global Investment Manager Database.

In 2021, the ESG ratings for all asset classes either improved or remained the same, with the weighted average ESG rating of the total portfolio delivering a 25% improvement from the weighted average in 2020. The long-term trend is positive.

The UWA Investment Portfolio represents the aggregation of debt and equity held within a range of underlying companies.Ownership provides UWA, through its Implemented Consultant, with the scope to directly influence companies through the exercise of voting rights and/or actively engaging with senior management on strategic issues. Divestment of ownership, while an option in certain circumstances, removes the influence UWA, through its Implemented Consultant, can have with underlying companies.

Investors adopting this approach believe that by actively engaging with companies they can better influence management to deliver improved and more sustainable outcomes. Engagement can be light touch, via letters, or more active, through investors holding conversations with management and boards to set expectations on strategy and implementation.

There have been a number of changes in the past decade that have pushed investors towards an engagement model. One of the most instrumental factors was the increased focus on climate change, particularly following the UN Paris Agreement on Climate Change in 2015. The Paris Agreement’s central aim was to strengthen the global response to the threat of climate change by keeping the global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.

2021 manager engagement by topic:

This climate change focus is evidenced in the Implemented Consultant’s engagement with its appointed Australian investment managers during 2021, summarised in the following table. Further detail on the Implemented Consultant’s monitoring approach and voting activity, including examples of Mercer’s direct engagement with the largest Australian companies, and links to the full proxy voting record can be found in Mercer’s Annual Sustainable Investment Report.

UWA believes climate change poses a systemic risk, with financial impacts driven by two key sources of change: Firstly, the physical damages expected from an increase in average global temperatures; and secondly the risks associated with the transition to a low-carbon economy.

Each of these changes presents both risks and opportunities to investors.

Potential financial impacts are taken into account at a diversified portfolio level, through portfolio construction within asset classes, and in the investment manager selection and monitoring processes. The approach UWA’s Implemented Consultant, Mercer, has adopted on UWA’s behalf is consistent with the framework recommended by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).

This approach is focused on the climate transition and transition capacity building. Mercer has also made a commitment to achieving net zero across all its investment platforms by 2050. As part of Mercer’s monitoring of its net zero commitment, they track carbon intensity that has occurred in the past, together with comprehensive transition metrics that look forward to where future portfolio emissions reductions can be prioritised.

Source: Mercer Investments (Australia) Limited

Weighted Average Carbon Intensity (WACI) is the most widely used metric to assess carbon risk for portfolios and make comparisons across assets, and is also recommended by the TCFD. The Implemented Consultant analyses the WACI across investment portfolios and includes this metric alongside risk and return metrics within the quarterly reports provided to UWA’s Investment Committee.

WACI vs Benchmark

As at 31 December 2021, all asset classes at an aggregate level had a WACI equal or lower than the benchmark:

Findings

All underlying funds are lower than their respective benchmarks, except Australian Shares for Tax Exempt Investors, 11.5% above benchmark.

The total weighted average carbon intensity ("WACI") of UWA’s Equities investments is 115, which is 26.2% lower than the equivalent benchmark. The breakdown of this contribution is found in the chart above.

In addition to climate scenario modelling, Mercer’s proprietary Analytics for Climate Transition (“ACT”) tool considers 15 different metrics including transition risk, policy risk, UN Sustainable Development Goals (“SDG”) alignment and potential emissions from reserves (see figure below). This forward looking tool is used to assess holdings-level exposure on transition capacity and, importantly, stranded asset risk given the transitionary environment that is now well under way.

Source: Mercer Investments (Australia) Limited

Both UWA and its Implemented Consultant, Mercer, recognise the scientific guidance on climate change and the importance of transitioning away from fossil fuel reliance at the pace required to keep the additional average temperature rise to ‘well below 2°C’, as per the 2015 Paris Agreement. To aim for 1.5°C, the recommended scientific target, we must reach net zero carbon emissions by 2050, ideally earlier, and achieve a 45-50% reduction by 2030. That means transition action is required today to avoid delayed and disorderly transition later and the worst of the physical damage and loss impacts that come with even higher warming scenarios.

Mercer has committed to assisting UWA meet its 2040 net zero commitment. UWA’s globally invested portfolio, managed by Mercer, is currently aiming for a 2050 target. The Investment Committee will continue to work with Mercer to ensure UWA can meet its net zero target. Mercer has been a leader on climate change for investors since it’s first major paper in 2011 and its Investing in a Time of Climate Change research on climate scenario analysis for investors in 2015 and 2019. In late 2020 Mercer established an Analytics for Climate Transition tool and advice framework to help investors set net zero emissions targets for portfolios, with confidence in how investment objectives could still be met.

Mercer has documented more detail on its Investment Approach to Climate Change. This document will be updated later in 2022 with the latest scenario analysis and metrics and targets views. Integration, active ownership and investment in the solutions – all with a focus on transition in the real world, not just portfolio changes – are the priority approaches.

UWA is against slavery in all its forms and strives to respect human rights across the organisations’ activities.

The Implemented Consultant is committed to assessing and addressing modern slavery risks in its investment processes, and ensuring its appointed investment managers and investee companies do the same. The diagram below outlines the components of the Implemented Consultant’s modern slavery program and the activities that have been undertaken.

Source: Mercer Investments (Australia) Limited

1. The Implemented Consultant’s approach to assessing and seeking to mitigate the risk of modern slavery within portfolios is outlined in the Investment Approach to Modern Slavery. In 2021, a total portfolio modern slavery risk assessment resulted in dedicated manager engagements by Mercer during the second half of the year where country and sector exposures indicated high potential risk. The asset class thematic risk assessment and holdings-level country and industry risk assessments identified risk hotspots in a few asset classes, such as emerging market equities and bonds.
2. Some of the highest risk country and sector exposures identified in the emerging market shares portfolio included India and China.
3. There were no companies that met the Controversy flag assessment for modern slavery (i.e. ‘red flags’).

Modern slavery was a key theme in Mercer’s 2021 Manager ESG Survey. Key findings from investment manager responses for Australian portfolios included:

• 66% of manager strategies have undertaken a human rights or labour practices risk assessment.
• 66% have also put policies in place and undertaken training of colleagues, and 51% have been engaging with investee companies.