NGS Super divests from oil and gas producers

NGS Super has divested from more than $190 million in oil and gas exploration and production companies, predominately Woodside and Santos.

The divestment is in line with the fund's announced target of a 35% reduction of Scope 1 and Scope 2 carbon emissions by 2025 within the Diversified MySuper portfolio.

The fund has restrictions on holding companies that generate more than 30% of revenue from distribution, power generation, or extraction of thermal coal, and has now expanded those restrictions to include companies who are in the oil and gas production and exploration sector.

"We identified the range of companies through our analysis that we believe will become stranded in the future and therefore are on our exclusion list until such time that we get additional information that would indicate that the biz has materially changed direction," said NGS Super CIO Ben Squires.

"We don't think that's feasible for many of those companies to do that."

The $13.4 billion fund set a net zero target for 2030 last year and has progressively rolled out interim strategies to support that goal. In May NGS Super announced that it is aiming to reduce its carbon footprint by 35% by 2025.

The fund conducted a baseline measurement of the carbon intensity in the Diversified (MySuper) investment option in which more than 70% of the membership is invested and has conducted scenario analysis to plan the trajectory for how it can transition its portfolio to meet the 2030 target. In May the fund flagged that it would divest from stocks that they deem a stranded asset.

"We didn't [divest] in 2021 off the back of our initial establishment of the target because the overall research we needed to do was to understand the degree of carbon across our portfolio," Squires said. "That was the first body of work. Then we introduced the modelling that we needed to perform across each individual holding to assess the two risks of stranded asset risk and physical asset risk, and we were also in discussions with our active managers, what their position was in terms of the price action on these particular companies."

Squires said that in light of geopolitical tension and supply shocks resulting in the rally of oil and gas prices, their holdings in the nominated companies hit the price points the fund had agreed to with their external managers, triggering the divestment.

"As we look out to the horizon, we believe the long term returns of the oil an gas sector are significantly impaired," Squires said. "It's difficult to say that this impairment would happen in two years, five years or ten years.

"All we can do is say when we look out into the horizon, we can see there is impairment and we can invest that capital into companies where we don't have that view where we can see there is a clear path to continue to grow market share and grow revenue and therefore generate higher returns for us as a shareholder."

Squires says the divestment will not introduce significant enough tracking error to raise concerns with meeting the performance test under Your Future Your Super (YFYS).

"We worked through the rationale around our YFYS risk, but the other important point is that we've identified a number of hedges that aren't derivative-based exposures to oil and gas, it's other commodities-based derivatives - that have a higher correlation to oil and gas. Using those hedges mitigates the risk of divesting from oil and gas producers. It doesn't completely remove the risk, there's always basis risk, but we can mitigate the tracking error and it's small anyway."

Reaction to NGS Super's announcement was mixed.

"This is a giant step forward for the fund and its members, and raises the bar for climate action in the superannuation industry," said Market Forces superannuation funds campaigner Brett Morgan. "This policy does not rule out investment in all companies expanding the fossil fuel industry. NGS must go further and divest from companies such as Siemens and General Electric which are building new gas power plants and undermining climate action by locking in decades of emissions."

However, Australasian Centre for Corporate Responsibility (ACCR) executive director Brynn O'Brien called the divestment a "cop out."

"Divestment should be a tool of absolute last resort," O'Brien said. "Climate-aware institutional investors considering divesting should be thinking very hard about what power they are giving up. If investors most agreeable to rapid decarbonisation sell their shares, they lose their influence. Decisions will be made by those around the table.

"Reducing real-world greenhouse gas emissions should be a higher priority for long term investors than scrubbing their portfolios of carbon."

Read more: NGS SuperSantosWoodsideCIO Ben SquiresBrynn O'BrienAustralasian Centre for Corporate ResponsibilityBrett MorganMarket Forces