Ausbil has excluded companies that derive more than 10% of earnings from direct and indirect fossil fuel holdings from its Active Sustainable Equity Fund.
The fund has recently celebrated its third year since inception, reporting an 11.77% annual return since inception 31 January 2018, compared to the benchmark of the ASX200, which returned 7% pa over the same time period.
Previously, the fund had excluded material investments in controversial activities such as uranium, thermal coal, gambling, alcohol, tobacco, weapons and armaments, and pornography.
The exclusion list has been expanded to include investing in exploration, mining and/or the distribution of fossil fuels, including oil, gas, oil sands and all coal.
This fund excludes two types of companies - those not meting the minimum ESG hurdles, and companies that have material exposure to controversial sectors," said Mans Carlsson, Ausbil's head of ESG research. "This historically included thermal coal, and this was a threshold of more than 10% direct or indirect earnings. For instance, if you're a thermal coal company, it was a straightforward exclusion. If you're a company that provides service to the coal industry and that's more than 10% of the earnings, you're automatically excluded. We've extended that screen to include other fossil fuels."
Excluding companies with more than 10% direct or indirect earnings derived from fossil fuels has excluded a further 10.5% of the investible universe, Carlsson said. In total, approximately 25% of the ASX200 index is excluded from the investible universe of the Ausbil Active Sustainable Equity Fund.
The affected companies have already been transitioned out of the fund, Carlsson said.
"We didn't have many stocks that we needed to transition out," he said. "Companies like diversified miners, thermal coal and other fossil fuels are a fairly small component, but there were some cases where they were above the threshold."
Ausbil's ESG and sustainable investing model is based in deep fundamental ESG research, engagement and advocacy across the universe of investable companies on the ASX. As part of this investment backdrop, Ausbil sees themes like decarbonisation and global warming are driving a growing energy thematic that will eventually tip the scales toward alternative energy, most likely faster than previously thought.
"We're dialing up that search for companies that can benefit from decarbonization," Carlsson said.
Carlsson pointed to lithium companies as an example of that opportunity set, as well as indirect exposures to decarbonisation like Macquarie Group, which has named decarbonisation as business theme.
"We know the UN has called climate change the defining issue of our time, and for us as investors we have to look at this for our investments," he said. "Effectively it comes down to two things - one is physical climate change risk, the other is transition risk."
Ausbil notes the energy transition is "well underway" and that governments around the world are accelerating policy initiatives that support the substitution of fossil fuels with renewable fuel sources.
"That trend is accelerating, and we've seen countries and corporates making pledges towards next zero," Carlsson said. "China, the new US administration take climate change very seriously and you can see where this is heading. Companies have increasingly made net zero commitments as well. This is the background as to why we've chosen to eliminate fossil fuels from our investible universe."