Engagement or divestment: How a $150bn fund decides

The chief executive of one of Australia’s largest super funds has revealed insights into responsible ownership within its investment processes and how it tackles challenges related to corporate engagement.

Speaking at the RIAA Conference 2024 in Sydney last week, Aware Super’s Deanne Stewart outlined the fund’s goal, as an institutional investor, to have a positive impact on corporate Australia.

“By positive impact, I mean two things. Firstly and primarily, better value over time for shareholders, but secondly, [it’s] that enduring sustainability aspect of it,” she said.

“You can either go that alone just with one-on-one engagement and sometimes that certainly has an impact, whether it be the private conversations we may have with a chair or a board, we can absolutely, behind the scenes, see that positive action. But you’ll often see companies stand up and change – whether it be changing their board structure, changing the diversity, changing their remuneration – when you’ve actually seen many more investors taking action.”

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For the fund, having a clear framework to lean back on remains crucial, she said, in order to drive positive change within its investments.

This approach ensures a systematic response to evolving challenges like artificial intelligence, preventing the fund from becoming overwhelmed by tackling issues from multiple directions.

“A lot of these things, particularly where they’re very nuanced, is much more of a case-by-case basis, but you can get drowned in that, so certainly, we look at the nuance in the case by case, but at the same time, have a very clear engagement policy and divestment framework as well,” Stewart said.

“And we look to continually evolve that because the reality is, things are changing so dramatically. Ultimately, you do need a clear framework with the way that you engage in these topics to make sure that you’re addressing them as systematically as possible, but you’re also making sure that emotions don’t carry the day that you’re being as clinical and as disciplined as possible.”

Engagement with companies marks the bulk of Aware Super’s efforts, Stewart said, while divestment is “really at the extreme”.

Last month, the $150 billion fund, along with several institutional investors such as US pension funds CalPERS and State Board of Administration, announced its intention to vote against Woodside’s climate plan at the company’s annual general meeting. Additionally, they stated they would oppose the re-election of Woodside chair Richard Goyder, citing insufficient progress by Woodside in its climate transition plans.

“In terms of engagement, it is very much a framework that’s based on where we see the key risks, and ultimately from that, how do we actually prioritise the companies and then engage with them,” she said.

“We create a plan, both every year and every three years, in each of the areas where we see the most risk, what are the companies most exposed to that or at risk the most, that becomes the priority companies that we then go and engage with.”

For Aware Super, she said, engagement remains the far-preferred tool in its arsenal.

“Ultimately, what you want to do is be part of the solution and part of that transition for companies to either evolve from a climate change perspective, or actually address their cultural issues, because that’s where value is unlocked,” Stewart said.

Stewart said that on the other end of the spectrum, the fund’s divestment framework is very clear. It carefully considers the costs and challenges of ongoing engagement with a company.

“If companies are doing something either clearly illegal, from an international treaty perspective for example, that is a clear indicator from a divestment perspective. Or indeed, if the near-term stranded cost is way too high,” Stewart said.

“We look at those aspects but also things like the tracking error, that if you actually start looking at a divestment, how much risk does that expose? At the end of the day, we’re there to look at the value of a company and getting the best possible returns, so the last thing we want to do is expose our members to huge tracking error as well.”

The importance of data

However, in order to make these informed decisions on whether to engage or divest from companies, stewards like Aware Super rely on data, which isn’t always accessible, she said.

“It would be wonderful to have that full dataset from every company, standardised with clear metrics – that is ultimately nirvana,” Stewart said.

She said “big steps” are underway, including the Australian government’s sustainable finance strategy and initiatives towards mandatory climate disclosures and a sustainable finance taxonomy.

In March, Treasurer Jim Chalmers announced Australia’s largest companies will be subject to a series of new climate reporting standards come 2025, with the climate reporting bill finally before Parliament following three public consultations in 2023 that gathered over 250 submissions in total.

It has since been backed by an alliance of 15 Australian organisations representing business, finance, shareholders, and retail and institutional investors, who shared that a climate reporting framework that incentivises high-quality, useful, and internationally aligned climate-related disclosures is “essential” to maintain Australia’s place in the global economy.

“Hopefully, that stays really pragmatic in the way that it’s adopted in Australia, that will also apply from an institutional investor’s perspective,” Stewart said.

“That is, I would say a challenge [for us] in the way that the team goes about it, but I think they’ve also got very much an ethos of ‘don’t let perfection get in the way of progress’. So, with the data that we do have, and the companies we can work with, how do we utilise that best to make an assessment of where the risks really lie, which companies are much more exposed – that then allows us to prioritise who we engage with and get far deeper with those companies or where the real risks lie and how they’re addressing them.”