31 August 2021

Getting down to net-zero Down Under

QBE is the only Australian insurer to be part of the Net-Zero Asset Owner Alliance so far. Its group CIO, Gary Brader, discusses the firm's net-zero commitment and why, even when the target is 29 years away today is the day to act. Interview by Vincent Huck

QBE joined the NZAOA in November last year, I assume there is always a bit of internal back and forth before one makes such a pledge, can you give us a flavour of those internal conversation at QBE?

Importantly, it wasn't a fresh conversation. We started impact investing in 2014 with the intent to find, and help create, more and more assets that fit our risk/return objectives, but also that had an overlay of social or environmental deliberate, measurable, positive impact. That then became our 'Premiums4Good' programme, where we link customer premiums to our impact investing agenda. That pool now has US $1.4bn with an ambition to take it to US $2bn by 2025.

This dictated our thinking in terms of allocation and what sort of assets we should buy more of, and which we should divest from, like coal.

So when it came to 'do we want to join the Net-Zero Asset Owner Alliance?', It was a short conversation, really. There were only two questions to answer: Do we want to sign now or later? Because if you accept that this [movement] is only going one way and is inevitable and desirable, then do you want to wait and go with what has already been decided, or do you get in early and help shape and influence the topic? We wanted a voice at the table, so it made sense to join now.

And the second question was, 'what do we want to sign up to?' There are a lot of initiatives out there, and you can't join every single one. So you have to decide which you think will stand the test of time. We felt this was it, and it is really in line with the fact that we were early signatories to the UN-PRI.

Have you put anything into practice yet, or is it still - as you said - a matter of understanding things, and getting your head around the topic?

We've got an obligation within one year of signing up to specific targets for 2025. We're working through what that looks like for us, there are two asset classes in scope for that: corporate credit and equities.

So, do we already have hard net-zero targets for 2025? No, but we will have them by November.

We have other targets - our credit book is mapped to low intensity following the MSCI carbon-intensity metrics, so we screen as low and we intend staying there.

We also have a target of $2bn impact investments by 2025, which includes transition-supporting assets and nature-based carbon-capture solutions. We can get gross carbon down very, very low. But we're very mindful of the fact that if you want to get the better sequestration/capture assets at a better price, then what people will have to pay in two or three years' time, when they realise they've [already picked] all the low-hanging fruit and there's nothing much left to do to reduce on gross [carbon emissions], then we want to own the assets before others need to queue up and pay 30% more. There's a very strong economic case to be first mover.

And of course, any asset that we may have that is going to be unhelpful or counterproductive in the net-zero journey, I would rather try to find a buyer for that in the near future. We are mindful of the strategic importance of getting in early and influencing, and of the economic imperative to have more assets that are going to go up in value, and a lot less that are at risk of being stranded.

Before making a net-zero pledge I imagine you had to assess where your portfolio is compared to a net-zero scenario. What were the findings of that assessment in your corporate bond and equity holdings?

We've mapped out the carbon intensity of our corporate credit holdings looking at greenhouse gas emissions per unit of revenue, using the MSCI lens, and we are happy to be at the low end of the carbon-intensity spectrum.

On the equity side, we moved to a much more conservative position early last year, as COVID was shaking markets and introducing a lot of uncertainty. So we don't have a listed equity position, currently, so the footprint there is not much. And we're very mindful that as we move to re-risk, we'll be doing so through with the endgame in mind, and not introducing carbon intensity to the portfolio.

Do we know exactly what our carbon footprint is today? No. Does anybody know? No.

We are working to approximate our footprint. I'm not going to be caught up with perfection, we're not going to get it exactly right the first time but I don't want to wait around until the metrics are completely landed and we've got perfect information. We can do a reasonable job of approximating the footprint and knowing which asset classes and securities are the most carbon intensive, and therefore managing them down over time.

As an Australian-headquartered group, you have a significant exposure to Australian sovereign bonds, how does it fit in the net-zero narrative? Some insurers argue that this is their zero-risk investment to match liabilities, and that it falls out of their ESG agenda, but that they focus on other parts of the portfolio...

I don't sit in that camp. I don't like the idea of saying, 'we're going to invest in this here, but not invest over there'. The same way we have revenue thresholds for corporates, we could have thresholds for sovereigns and those thresholds could be a percentage of all exports, or a percentage of tax revenue, we can use the same concept.

You mentioned investment in carbon sequestration assets. Are you looking at the natural ones, or tech ones as well?

Both are attractive. The one we are more likely to move first on is nature-based solutions, because there is a lot of tech that is unproven, not just in its efficacy, but potentially in its commerciality.

How trees are going to grow, where they're going to grow, how fast they're going to grow is a lot more predictable. Do we know how much carbon credits are going to be worth in two, three or five years? No, but it feels like that over time, there'll be a limited supply of carbon credits and probably a growing demand. So we want to be in the business of owning assets that are sequestering carbon, that we can get paid for via hard dollars or carbon credits which we can monetize. That is a safer investment than many of the VC tech options out there right now.

The role of carbon credits in making the whole economy net-zero is not straightforward, because carbon credits could be seen as a licence to pollute ... How do you see carbon credits' role in the broader picture of transitioning the whole economy towards net zero?

Fundamentally it's hard to see how putting a price on it is optional. I can't see how we can achieve so much, unless we do put a price on it and that price rises over time. There has to be a rising cost of pollution and that cost ultimately becomes so high that some people choose not to pay it.

Going back to the targets on corporate credits and equity you are working on, what challenges are you facing?

It's around what definitions and metrics are going to become lingua franca. The fact that it's evolving makes it challenging; the science is evolving, the data is evolving, expectations are evolving, and the metrics are evolving. So, you don't want to invest all your eggs in one basket in case it doesn't turn out to be the language and the framework that ends up being dominant.

The key date, 2050, is the one everyone has pledged to be net-zero. Not to be disrespectful, but the chances of you being a CIO – and a CIO at QBE – are slim... And that is probably the case for a lot of people in the investment team at QBE who will have moved on or retired. How do you work to such a long-term target on a personal level?

It helps being impatient – and I am. We can't solve it this week or this year, but we have made a commitment. We genuinely are in a race. We don't want to wait till others tell us how they're going to solve it, and then we all have to follow their agenda. We can play a role in helping create and frame the agenda.

Gary Brader
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