Rest members are expected to be better off by achieving Paris Agreement goals

21 October 2021
 

Scenario analysis has estimated the impact of climate change on investment returns


Scenario analysis and stress testing of Rest’s investment portfolio has estimated our members will be better off if the global community acts to keep temperature rises to well below two degrees Celsius by 2100.

Scenario analysis of Rest’s default Core Strategy investment option has estimated that annualised investment returns could be nearly two percentage points higher by 2040 if the world acts to achieve the Paris Agreement goals.

The average 48-year-old Rest member has an account balance of $67,000. The average salary for workers of this age in the retail industry is around $48,000 per year.

A member with this account balance and salary could be approximately $50,000 better off when they retire at age 67 in 2040 if the world acts to keep temperature rises below two degrees Celsius.i Their account balance at retirement would be around 29 per cent higher.

“Climate change poses a material financial risk to our members’ retirement savings and it’s critical that the global community takes collective action to meet the goals of the Paris Agreement,” said Andrew Lill, Rest’s Chief Investment Officer.

“With $66 billion in funds under management, it’s critical that we play our part. We have set our roadmap to achieve a net zero carbon footprint for the fund by 2050, and it is consistent with the goals of the Paris Agreement.

“Many of our members work in part-time, casual and lower-income jobs. Ultimately, this is about helping them achieve their personal best retirement outcome.

“We believe these actions will mitigate risks and also open up investment opportunities as the world transitions to a lower-carbon economy.

Rest, recently named as a Responsible Investment Leader for 2020 by the Responsible Investment Association Australasia (RIAA), has set six measures on its net zero emissions by 2050 roadmap.

Meanwhile, Rest’s wholly owned Collgar Wind Farm in Western Australia was last week ranked by GRESB as one of the best infrastructure assets in the world for environmental, social and governance (ESG) management and performance.

The wind farm, which generated around one-fifth of WA’s wholesale renewable power in the Financial Year 2021, received a total score of 99 out of 100 from GRESB.

This score gave it a first-placed ranking for Wind Power Generation asset globally and third-placed ranking out of the 558 Infrastructure assets assessed. Collgar Wind Farm was recognised by GRESB for demonstrating outstanding leadership in sustainability, receiving the 2021 Renewable Power Sector Leader designation.

Rest has also made an AU$80 million commitment to Copenhagen Infrastructure Partners’ (CIP) Energy Transition Fund. This relationship with CIP will provide Rest the potential opportunity to invest in a significant renewable project being developed in Australia.
 

Rest has set six measures to achieve a net zero carbon footprint by 2050

 
  • By 31 December 2021, we intend to divest from all listed companies that derive more than 10 per cent of their revenue from thermal coal mining – unless the company has a credible net zero by 2050 plan or science-based targets. We advocate for a ‘just transition’ for those communities that will need support as we move to a lower-carbon economy.  
  • We will advocate for an economy-wide reduction of emissions of 45 per cent by 2030, based on 2005 levels, particularly in order to continue reducing the Weighted Average Carbon Intensity of the equities portfolio year on year.
  • We have an ambition to increase our investment in renewable energy and low-carbon assets to $2 billion by 2025.
  • We are aiming to have our directly owned property assets achieve net zero carbon emissions in operation by 2030.
  • By 2026, we have an ambition to allocate one per cent of the portfolio to ‘impact investments’ that generate strong returns and also provide benefits to society and the environment. 
  • We will regularly conduct analysis and stress testing of our portfolio against a number of different climate change scenarios, including for a society where there are net zero carbon emissions by 2050.

In November last year, Rest confirmed its commitment to achieving a net zero carbon footprint for the fund by 2050.

“This was an important next step in our approach to managing environmental social and governance (ESG) factors in our investment process,” said Mr Lill.

“Our members’ retirement savings will also be contributing to a more sustainable future. More of their money will be invested in assets that will contribute to a more sustainable future, and less will be invested in assets that are fuelling climate change, like thermal coal.”

More details on the measures and roadmap can be found here.


For further information, please contact:

Pauline Hayes
Head of Corporate Communications

Pauline.hayes@rest.com.au
m: 0458 815 252 

This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on the information or deciding whether to acquire or hold a product, consider its appropriateness and the relevant PDS which is available at rest.com.au. Issued by Retail Employees Superannuation Pty Limited ABN 39 001 987 739, AFSL 24 0003 (Rest), trustee of Retail Employees Superannuation Trust ABN 62 653 671 394.


1Explanation of the estimated account balance
 
This is based on projections of the potential retirement balance of a 48-year-old Rest member with an account balance of $67,000 and a salary of $48,000.
 
The projections are not intended to be exact figures. They do not take into account any changes in the cost of living between the time of the preparation of the estimate and the future time, or future changes to laws after the date of preparation of these assumptions. Do not rely on this projection to make decisions about your retirement. You should consider your own needs, financial situation and investment objectives and may wish to get advice from a licensed financial adviser before making any financial decisions.
 
Projected account balances
 
Using the assumptions below, the retirement balance for this member is estimated at:


 
  • $226,408 in scenario one, in which the world acts to keep temperature rises below two degrees Celsius; and
  • $175,855 in scenario two, which is based on the current global policy settings and targets where temperatures are expected to exceed the goals of the Paris Agreement.
 
The balance in scenario one is $50,553 (or around 29 per cent) higher than the balance in scenario two. 
 
The projections make the following assumptions:
 
  • continuous accumulation of Superannuation Guarantee contributions and no additional personal contributions from age 48 in 2021 to retirement at age 67 in 2040;
  • progressive Superannuation Guarantee increases to 12 per cent by 2025;
  • investment earnings are based on modelling of the impact of two climate change scenarios on Rest’s default Core Strategy option (modelled returns are gross of tax and net of Core Strategy’s investment fees – more information follows);
  • annual inflation of 3.2 per cent reflecting increases to wages and the standard of living;
  • the member is incurring Rest Super administration fees of $1.50 per week plus 0.12 per cent of their account balance per annum (the account balance fee component is capped at $300);
  • earnings are taxed at the relevant rate; and
  • the member does not have insurance.
 
Investment earnings according to climate change models
 
The investment earnings are based on scenario analysis of the strategic asset allocation of Rest’s Core Strategy carried out by JANA in 2021.
 
  • Scenario one is based on the world acting to keep temperature increases to up to 1.8 degrees Celsius by 2100, and is aligned to the Paris Agreement. In this scenario, JANA estimated Core Strategy’s average annualised returns would be 6.06 per cent, per annum to 2040.
 
  • Scenario two is based on the current global policy settings and targets where temperatures are expected to exceed the goals of the Paris Agreement up to 3.2 degrees Celsius by 2100. In this scenario, Core Strategy’s estimated average annualised returns would be 4.18 per cent, per annum to 2040.
     
The estimated investment earnings are gross of tax and net of Core Strategy’s investment fees of 0.61 per cent of the account balance per annum.
 
The ‘average member’ scenario
 
As at 30 June 2021, the average balance for a 40-year-old Rest member was around $67,000, and the average balance for 45-54-year-olds was $68,900.
 
The most-recent data from the ABS (Employee Earnings and Hours, Australia, May 2018 released in January 2019), showed the weekly cash earnings for 45-54-year-olds in the retail trade industry was $914.70 per week – or $47,564.40 per year.
 
About the JANA analysis
 
To consider the potential impacts of climate change on an investment portfolio, JANA has modelled two very different scenarios to assess a range of potential impacts on Rest’s risk asset returns to 2040. The scenarios are sourced from the International Energy Agency (IEA).
 
Scenario one models for a more aggressive and nearer term globally co-ordinated policy response which achieves net zero emissions by 2070 and limits the global average temperature rise to less than two degrees Celsius above pre-industrial levels by 2100.
 
Scenario two aims to explore the implications of announced targets as well as the existing energy policies of countries around the world. Under this scenario, long-term global average temperature increases would surpass the Paris Agreement’s goals. The IEA estimates an increase of more than 2.7 degrees Celsius relative to pre-industrial levels by 2100.
 
For these scenario models, there are uncertainties that challenge the robustness of any analysis of climate-related financial impacts. These include:


 
  • gaps in climate knowledge and research;
  • unknowables related to future policy, technology developments and physical impacts;
  • the limitations of economic and climate models in capturing differential impacts across regions; and
  • complex interactions and feedback loops between climate, economies and markets which are beyond our current understanding.
 
Opinions expressed constitute JANA’s judgement at the time of analysis and are subject to change. JANA does not recommend or suggest that the Trustee should make any decisions based solely on the information obtained through its use of JANA’s models. The modelling outputs are a calculated estimation and are not recommendations or investment advice. The Trustee is responsible for using its own judgment to assess information provided through JANA’s models.
 
Any past performance noted is not indicative of future performance. JANA does not provide any guarantee about the future performance of the investment products, managers, asset classes or capital markets discussed.
 
The analysis in this projection is based on a range of assumptions which influence the output. The assumptions inevitably contain an element of subjective judgement which may not be realised.
 
Except where under statute liability cannot be excluded, no liability (whether arising in negligence or otherwise) is accepted by JANA, its directors or its employees for any errors or omissions or for any losses caused to any persons acting on the information contained in this presentation.