Risk management

CSC’s investment risk management (including ESG matters)

There is significant variation in the relevance of ESG issues to investments, based on features such as the nature of a company’s products, the markets in which it operates, or how its supply chain is changing. Analysing this and using this analysis to improve estimates of investment risk and return is what global standard setters call “ESG integration”.1

Exclusions

We do not invest in companies which we know to be involved in activities contrary to Australian government rules and regulations, such as cluster munitions and landmines.

We also exclude investments where we consider this a cost-effective way to protect CSC portfolios from risks we believe are not justified by the returns. For example:

  • We divested of tobacco producers as we considered this a cost-effective way to protect the portfolio in the long term against loss of value from increasing regulation.

  • We divested companies that derive 70% or more of their revenue from thermal coal production because we viewed their long-term investment returns as under pressure from cleaner-energy competition.

We identify such companies using MSCI’s Business Involvement Screening Research methodology. This can mean some exposures to these risks are not identified, but in the context of our portfolio-level risk-management objectives, we consider these to be immaterial.2

We do not divest (or threaten divestment) as a way to provoke companies to change.

Frequently asked questions

Risk Management through stewardship

While some risks to the value of customers’ retirement savings (including ESG risks) can be avoided by choosing investments carefully, others (such as those affecting whole markets or economies) cannot cost-effectively be avoided through investment decisions alone.  We therefore seek to reduce the impact of such “non-diversifiable” risks by pursuing improvements in company and market settings that are either the source of such risks or avenues for their management.  Global standard setters refer to such investor activity as stewardship.3

Co-benefits

Our stewardship, like our ESG integration, is aimed at achieving more dependable retirement outcomes. Some (though not all) of the improvements we pursue through stewardship involve better management of environmental and social matters by businesses.  These can also have a positive outcome in the world beyond the portfolios.

 

There is a growing body of research about how investors do (and do not) have a positive impact:4

  • Allocating capital to undercapitalised activities;
  • Using ownership rights and opportunities (such as voting or engagement) to promote ‘real world’ improvements;
  • Contributing to others’ aligned efforts (including those of companies, investment partners, industry peers, market standard setters, and collaborative initiatives)5 through thought leadership, insights or other support.

1 Definitions for Responsible Investment Approaches | GSIA (gsi-alliance.org)

2 Source: MSCI <0.005%

Definitions for Responsible Investment Approaches | GSIA (gsi-alliance.org)

E.g. How Investors Can (and Can't) Create Social Value (columbia.edu); Kölbel, J. F., Heeb, F., Paetzold, F., & Busch, T. (2020). Can Sustainable Investing Save the World? Reviewing the Mechanisms of Investor Impact. Organization & Environment, 33(4), 554-574. https://doi.org/10.1177/1086026620919202 ; Investor-Contribution-Discussion-Document.pdf (impactfrontiers.org)

E.g. CSC’s Chief Investment Officer (CIO) was the co-Chair of the World Economic Forum Global Future Council on Long-term Investing for 2016-2020—a role reflecting CSC’s proactive, thought leader approach to responsible investing and including ESG risks in our whole of portfolio risk assessment.

She is also a member of the Chartered Financial Analysts Institute (CFA) Future of Finance Advisory Council and was invited to participate in the The Rockefeller Foundation and Brookings Institution’s 17 Rooms Initiative in 2021.

She continues to contribute to global thought leadership through publications including the London School of Economics and Political Science library. Read her article about why organisational success depends on valuing higher quality, rather than simply lowest-cost routes to economic growth.