Mr BAYLEY - Thank you for coming in and it is good to see you. I am interested in your investment portfolio. The annual report shows that investments have gone up from $1.9 billion in 2021 22 to a bit over $2 billion this year. That is very welcome. I am interested in whether you have any investment guidelines around that, or whether you try to focus your investment? I am thinking specifically around climate change, climate risks, biodiversity crisis and an increasing move for responsible institutions to not invest in fossil fuel production and/or disinvest in fossil fuel production. What can you tell us about your guidelines and how you are responsibly investing?
Mr BALCOMBE - We have a very comprehensive investment policy. The underpinning of that investment policy is that you have to take risk in order to grow the investments. It's careful risk and it's risk in accordance with the determinants of the policy. The policy is quite complex from the point of view of the assets we participate in and the manner in which we manage the investment. We term ourselves as a passive investor. We don't manage the investments dynamically.
What we do is in about March or April every year we undertake a strategic asset allocation where we look at the existing allocation of the assets. We stress-test that investment, mainly from the point of view of diversification. We are a long term play. That is what creates inherent short term volatility. Year on year we might see some bounces, but we are creating a strong asset base. We are looking at a 15 year outlook to make sure that we are delivering strong and sustainable financial returns over time.
There are many elements we look at. During the year on a rolling basis we look at all the different types of investments we hold at the board level and interrogate our investment adviser in regard to that. We also then look at the specific fund we are investing in.
We would look at it in two situations. How we might alter the investments that we hold depends on how some of the stress tests that we might put the portfolio through but if we see benefit through changing our style of investments, we'll do that. It's not quite 'set and forget' but it's careful management and -
Mr BAYLEY - Is one of those lenses a climate one, investing in fossil fuels?
Mr BALCOMBE - I was going to move on to that. The challenge within that investment framework is that you have to diversify your assets. One of the things is that a component of our portfolio is in the Australian Stock Market, and the index there approximates the top 200 so we try to outperform the top 200. That ASX top 200 has exposure to the resource industry, and we can't not have a component of our portfolio to that -
Mr BAYLEY - You couldn't make an active decision not to invest?
Mr BALCOMBE - We could but then it would be to the detriment of the shape of the portfolio. That would be to the detriment of the long-term sustainability of the fund over time. It's a key component of the diversification, but moving on to ESG, from our point of view, it's in its infancy.
From a point of view of ESG and investments and things like that, they are generally in their infancy. When we do this annual cycle and review of these investments, we've asked our investment adviser to specifically look at the ESG credentials with regard to all the funds that we operate and are investing in. They are starting to prepare some benchmarks in comparison to all those.
By way of example, at our board meeting last Thursday, we had an education session on green bonds. One of the things we could do as an organisation is to take a position in green bonds. The challenge with green bonds is they're very long duration and so the long duration of those bonds is outside our investment appetite at the moment. The other issue is -
Mr BAYLEY - Is that because you're looking 15 years? Is that the window?
Mr BALCOMBE - Well, no. Generally, our bond investments are three to five years. The other challenge with green bonds is there's not a huge market and the other element is there's potential for green bonds to lose their green accreditation over time. That imposes another layer of risk on our investments. Effectively, what would happen if they lose their green credentials, the cost of those bonds would go up and we would see a write-down in our books. One of the things we do know is that one of the funds we invest in and I can't quite think which one it is called -
Mr KINGSTON - Capital Real Assets. There's just, if I can quickly, Chair, we've got two specific fund managers in our real assets, infrastructure and property. One is SUSI Global Energy Transition Fund, and the other one is SDCL Green Energy Solutions. They specifically target decarbonising energy production, increasing energy efficiency with different ways of doing street lighting and things like that, enabling clean energy utilisation through EV charging stations. Both funds are only investing in that move to decarbonisation and (inaudible), and they make up about 5 per cent of our total portfolio.
Mr BAYLEY - So, 5 per cent in total?
Mr KINGSTON - Yes.
