Objective:
Take a broader view on risk / return by including environmental, social, and governance (ESG) factors in decisions

Example:

• Review manager ESG ratings and promote integration with managers
• Climate scenario analysis and transition risk analysis using multiple metrics
• Diversity and modern slavery analysis

2023 highlights:

• ESG ratings
  The overall portfolio’s weighted average ESG rating is 1.80, which is 8% better than the universe
• Carbon footprint
  The weighted average carbon intensity (WACI) for listed equities is 24.9% below its benchmark. The overall portfolio has decarbonised by 12.0% (on a carbon footprint basis) from a 2020 baseline (128.0 v 145.3 in 2020).
• Climate transition
  Mercer has completed climate transition analysis which can be used as a tool by UWA to assist in establishing a decarbonisation pathway

Objective:
Help realisation of long-term value through voting and engagement.

Application:

•  Work closely with appointed listed equity investment managers on voting and engagement.
• Engage with companies and policymakers either directly or via managers and/or collaboratively.

2023 highlights:

• Engagement
  Mercer has an active engagement program with managers, collaborations with industry associations, and some portfolio companies directly.
• Voting
  Mercer’s appointed investment managers voted on Mercer’s behalf at 99% of Australian and global meetings.
• Modern Slavery
  No companies with high severity Modern Slavery flags were identified.

Objective:
Explore investment opportunities linked to sustainability themes and solutions.

Application:
Support UN Sustainable Development Goals (SDGs) and measure SDG alignment for Mercer sustainable labelled funds.

2023 highlights:

• UN Sustainable Development Goals (SDGs) alignment
  Support UN Sustainable Development Goals (SDGs) and measure SDG alignment for Mercer sustainable labelled funds.

Objective:
Screen portfolios for certain sectors, products or activities that meet Mercer Funds exclusions criteria.

Application
Screening of certain products and activities.

2023 highlights:

• Screening
  No breaches of current exclusions criteria were identified.

Mercer’s ESG ratings reflect to what extent the appointed managers integrate environmental, social and governance (ESG) factors into the investment process.

• At 31 Dec 2022, the weighted average ESG rating of UWA’s total portfolio was 1.80, slightly ‘outperforming’ the relevant, composite Universe ESG rating of 1.95 by 8% (0.15).

At 31 Dec 2023, the weighted avg. total portfolio ESG rating was 1.80, meaning no material change in the average rating this year.

Summary

• The weighted average ESG rating of UWA’s portfolio continues to be better than the universe* (1.80 vs. 2.21)

Methodology

• Mercer’s ESG ratings reflect to what extent the managers integrate ESG factors into the investment process. A rating of 1 is for the strongest ESG practices and 4 is for the weakest ESG practices.
• The Universe is based on the aggregate ratings for all strategies in the relevant asset classes within Mercer’s Global Investment Manager Database (GIMD).
• The ratings are based on in-depth due diligence following Mercer’s Four Factor Framework (Idea Generation, Portfolio Construction, Implementation, and Business Management).

The UWA Investment Portfolio represents the aggregation of debt and equity held within a range of underlying companies. Ownership provides UWA, through Mercer, with the scope to directly influence companies by exercising voting rights and/or actively engaging with senior management. Divestment of ownership, while an option in certain circumstances, removes the influence Mercer can have on behalf of UWA with underlying companies. Investors believe that by actively engaging with companies they can better influence and aim to change management to deliver improved and more sustainable outcomes. Engagement can be light touch, via letters, or more active, through conversations with management and Boards to set expectations on strategy and implementation. Mercer partners with its external investment managers to understand their direct engagement with companies, through an annual survey below, targeted follow up and topic-specific discussions.

Below and right are extracts from Mercer’s latest Manager Engagement Survey.

Both UWA and Mercer, recognise the scientific guidance on climate change and the importance of transitioning away from fossil fuel reliance at the pace required to keep the additional average temperature rise to ‘well below 2°C’, as per the 2015 Paris Agreement. That means transition action is required today to avoid delayed and disorderly transition later and the worst of the physical damage and loss impacts that come with even higher warming scenarios.

UWA has set a 2040 net zero emissions target across the University’s activities. UWA’s globally invested portfolio, managed by Mercer, is currently aiming for a net zero emissions 2050 target. The UWA Investment Committee will continue to work with Mercer to increasingly align the investment portfolio with UWA’s target where possible.

Mercer has been focused on climate change for investors since it’s first major paper in 2011 and its Investing in a Time of Climate Change research on climate scenario analysis for investors in 2015 and 2019. In late 2020 Mercer established an Analytics for Climate Transition tool and advice framework to help investors set net zero emissions targets for portfolios, with confidence in how investment objectives could still be met. The approach to transition can be explained in diagram below

Source: Mercer Investments (Australia) Limited

Weighted Average Carbon Intensity (WACI) is the measure of the portfolio’s exposure to carbon-intensive companies, expressed in tons CO2e / $M revenue.

WACI vs Benchmark

Summary

• Portfolio WACI vs composite benchmark: -24.9% Equities only (see chart)
• The total WACI of UWA’s Equities investments is significantly lower than the equivalent composite equity benchmark of 157.8.
• The total portfolio breakdown is shown in the table.

 Methodology

• WACI is a recommended metric of the Taskforce on Climate-related Financial Disclosures (TCFD).
• Going forward we will provide WACI as a secondary metric for reporting purposes.
• Total portfolio total in the table represents corporates and sovereigns WACI figures combined. This is weighted and combined to provide a total portfolio number in alignment with previous years analysis.
• However, going forward due to the methodology differences in the way WACI is calculated for corporates vs sovereigns, these will be split out and reported separately. In 2022, the Partnership for Carbon Accounting Financials (PCAF) issued industry standard guidance for sovereign emissions, which was implemented by our third-party data provider, MSCI. Going forward UWA will begin reporting sovereign emissions as well as corporate fixed income and providing two different intensity metrics.
• Reporting now includes a mix of actual data and proxied data, with the intention to further build out actual data coverage over time.
• *WACI data collection follows a different methodology for unlisted real assets and sovereigns.

Mercer uses absolute emissions as metric to measure and report on overall portfolio emissions. Absolute emissions is the industry preferred metric due to its direct link to atmospheric emissions. WACI (previous slide) will continue to be reported as a secondary metric and used by internal portfolio management teams for investment decision making. Another common term for absolute emissions is portfolio carbon footprint.

Going forward, UWA will look to use absolute emissions as a key metric to measure and track its commitment to net zero for its investments managed by Mercer.

Emissions Tracking

Summary

• As at December 2023, Mercer Funds in which UWA are invested have decarbonised by 12.0% on an Absolute Emission basis basis against a 2020 baseline year.

 Methodology

• Emissions data sourced from MSCI ESG Manager.

In addition to climate scenario modelling, Mercer’s proprietary Analytics for Climate Transition (“ACT”) tool is forward looking, going beyond just historical emissions, to assess holdings-level exposure on transition capacity and, importantly, stranded asset risk given the transitionary environment that is now well underway.

The below chart shows the categorisation of fund holdings by transition readiness and by weight in the portfolio.

Source: Mercer Investments (Australia) Limited

Summary

1. The majority of UWA’s assessed portfolio is categorised positively for transition capacity.
2. The University has limited exposure to ‘grey assets’ at 1.6% (of which 0.6% is in the dark grey category).
3. Mercer continues to engage with its appointed managers on transition progress across its underlying companies and participate in collaborative engagement with the top emitting companies globally.

Methodology

• Mercer’s ACT tool consolidates 15 different underlying metrics including emissions, potential emissions from reserves, transition preparedness, UN Sustainable Development Goals (“SDG”) alignment and solutions revenue.
• The unassessed portfolio component includes cash and derivatives.
• The Implemented Consultant’s approach is outlined further in its Investment Approach to Climate Change*.

UWA is against slavery in all its forms and strives to respect human rights across the organisations’ activities. Mercer is committed to assessing and seeking to address modern slavery risks in its investment processes, and asking its appointed investment managers and investee companies do the same.

The diagram below outlines the components of the Implemented Consultant’s modern slavery program and the activities that have been undertaken.

Source: Mercer Investments (Australia) Limited

Summary

The asset class risk assessment and holdings-level country and industry risk assessments identified potential hotspots in emerging market equities and bonds. Some of the highest risk country exposures identified in the emerging market shares portfolio included, India and China.

Modern Slavery Incident Indicator

There were no holdings with red flag incidents in any Mercer Funds

Methodology

Mercer has an investment specific modern slavery approach, which includes an ongoing program of engagement with managers based on red flags, holding risk assessment results and manager surveys.