Season 3, Episode 2 – Game Changers: Building climate-resilient investments through smart ESG strategy

Elena Lambros:

Hello and welcome to ESG Matters @ Ashurst. I'm Elena Lambros, our risk advisory partner specialising in climate change and sustainability. You are listening to our season three of Game Changers. In this season, you'll hear from industry leaders who are dedicated to solving the world's most pressing sustainability challenges.

From innovators at the cutting edge of technology to impact investors funding a cleaner energy future, each and every one of our guests is changing the game in their field.

In today's episode, you'll hear my conversation with Charlotte O'Meara, head of Responsible Investment at Challenger. Let's jump in and hear the discussion.

Hi Charlotte, welcome to the podcast. We're delighted you could join us today.

Charlotte O'Meara:

Thank you so much for having me. It's a great honour to be on your podcast.

Elena Lambros:

So I thought we might just start, if you could just explain a little bit about yourself and your role to our audience.

Charlotte O'Meara:

Absolutely. So, I have the great privilege of leading the ESG team at Challenger. Challenger, we operate two core businesses, an APRA-regulated life business and a funds management business. So, on the life side, Challenger Life Company is Australia's leading retirement income provider, and we give approximately $6 billion a year in guaranteed retirement income payments to our customers across Australia and Japan as well. We work with around 6,000 financial planners to provide retirees with reliable and secure income streams, and they range from fixed-term annuities to lifetime annuities.

And then we have our funds management business. So our funds business, we have a large active manager in Fidante Partners and that's a leading a multi-affiliate platform across various different asset classes. We have 20 affiliate investment teams, and then we also have Challenger Investment Management, which is a fixed-income provider that specialises in private credit and securitised products. And so, with all of that, I have a great role in leading the ESG team in helping all of those investment teams to integrate ESG risks across their investment portfolios.

So, it's an incredibly interesting and dynamic role. We cover a lot of ESG issues, so it's a broad role, but what we do is we help our investment teams to work out what risks are most material to their investment process and how they can integrate those risks, setting up their policies and frameworks, their ongoing reporting, and keeping them informed on some of the key ESG issues, which are always evolving and changing. So, it's an incredibly busy and dynamic role, but one I'm very lucky to have. I love it very much.

Elena Lambros:

Thank you. And I was just thinking, as you were talking, I was like, That is quite a lot of areas to integrate ESG across and also try and work out what areas you think you can make the most impact in and what are really important to you in your role. So, if I think about that, what would success really look like for you, and how do you actually measure that sustainable impact in your work?

Charlotte O'Meara:

It's such a good point. It is such a big role and a big remit. And I think if we think about at measurement, we look at it from a materiality lens. So when we're looking across our business, so across the life company and the funds management business, it's quite complex given how many different asset classes we cover. And so there'll be different ESG issues that we integrate from a materiality perspective that will be more material to different sectors, different asset classes.

And so, we really look at ESG from a materiality approach. I think we can't do all things in ESG. That is such a really big area to cover. So we look at what's most material to the asset classes and the sectors that we are working on. I mean, if we go back to what Challenger's purpose is, and as I mentioned, we are a leading retirement income provider, and our purpose is to provide our customers with financial security for retirement. And so that's the lens through which I look at success in terms of responsible investment.

It really, for me, is about ensuring that our investment decisions are not only financially sound but are also resilient to long-term sustainability risks. So, looking at that materiality approach, ESG integration through what are the most material ESG risks and opportunities, if we integrate those successfully into our business, we create long-term resilient investment portfolios that will be resilient to long-term risks, long-term shocks, and we'll ultimately provide our retirees with sustainable and stable retirement income well into the future.

In terms of how we measure that, we measure sustainable impact in several key ways, and there are three key components that we consider here at Challenger. Firstly, as I mentioned, we integrate ESG into our investment process. So that's number one key factor that's core to our policy, our processes, and our reporting. But secondly, we also track portfolio-level metrics, and we allied our reporting with global frameworks wherever we can.

So, as I mentioned, we're working on our climate disclosures at the moment to align to Australia's mandatory climate disclosure, which aligns with the AASB, which is based on an international climate standard. And we also look at the partnership for Carbon Accounting Financials or PCAF to measure our emissions as well and assess our climate risks and opportunities. And so that allows us to quantify our progress. And we look to quantify our progress and disclose that transparently to our stakeholders wherever we can.

So I use some examples of climate, but we are also a reporting entity under the Modern Slavery Act. So we report our modern slavery risks. So we look to report and disclose and be transparent wherever we can. I think the third component that's really, really important to us is that we engage actively with our companies, asset managers, issuers, broader industry collaborations to drive improvement in ESG across the industry. And that's a really important part of our process and something that we can measure success on, I think, especially in the climate space more recently.

But more broadly, if we think about when the Modern Slavery Act was introduced in Australia, we engaged collaboratively across the FSC, Responsible Investment Association. We've engaged collaboratively with a group called Investors Against Slavery and Trafficking. And through this collaboration, we really want to make sure that, as an industry, we are meeting the best interests of all of our investors by developing frameworks, developing toolkits, working on how we can get more data to measure our carbon, for example.

So engagement with not only our portfolio companies but also broader industry is a key part of how we integrate ESG and, I guess, how we measure success as well because we really come back to our core purpose of looking for a resilient investment ecosystem. And so, allowing us to provide stable retirement income for all of our retirees that invest with Challenger.

Elena Lambros:

Yeah, great. I really liked the way that you focused on what your purpose is at Challenger and that really long-term focus and stability for your retiree. And then I think about the way that you've used collaborative partnerships and a few of those measures. I was kind of curious to know regulatory compliance has become such a focus at the moment.

Obviously, you've mentioned mandatory disclosures a few times, and people are really, I think, looking quite deeply into those disclosures to understand what you were doing there. Have you seen that regulatory compliance help in terms of you being able to deliver on your purpose and integrate that ESG? Like have you seen it being quite helpful in terms of structuring disclosures, or is it just something you were doing anyway, so it's a bit more formal way of approaching it?

Charlotte O'Meara:

Yeah, that's a really good question. I think it has helped us to provide more structure. So if we look at the two really big sustainable finance regulatory initiatives that have impacted Challenger in recent times being the Modern Slavery Act and also now the Mandatory Climate Disclosures, as I've mentioned, we were doing a lot of those activities anyway. So, we were looking at modern slavery, human rights risks. We've been looking at climate risks and opportunities, but what this has allowed us to do is develop more formalised structures around how we do that and to look it in a much deeper way.

And it's guided us. It's provided more guidance for us to do that. So, if we think about Modern Slavery Act here in Australia and looking at how we assess risks across our supply chain and operations, it's given us some guidance of how to do that, and it's allowed us to formalise the structures around that the same way we have for climate risks. So, if we think about the mandatory climate disclosures in the AASB S2 Standard, if we think about the pillars, the governance strategy, risk management metrics, and targets, we've established a cross-functional working group across Challenger to address each of the requirements in those four pillars.

And while we were looking at climate risks and opportunities in the investment process anyway, where they were material to a sector or to an asset class, this has allowed us to really apply each of those four pillars in a much deeper way where we've been able to drill down into exactly what those material climate risks and opportunities are and to really measure what the emissions are, to have a look at what does success look like for us to set some parameters around that. So I think while we were doing a lot of those activities anyway, it's really given us a lot more guidance and structure and a forward-looking direction.

And I think, ultimately, from an investment perspective, in the first few years, we're all going to be learning together. We're all going to be testing our disclosures, what it looks like. But, ultimately, from an investment manager's perspective, they're going to have access to a much greater level of data on their portfolio companies, on the climate risks and opportunities and the emissions, and what the opportunities are in their sectors and in their asset classes. And I think that that is only going to be a really good thing for the portfolio managers. I think regulatory compliance, particularly around ESG, is often viewed in a dim light.

Elena Lambros:

It's a little bit, yeah.

Charlotte O'Meara:

It's going to be onerous for us. It's going to be really hard. But in actual fact, while all of that is still really true for companies across Australia at the moment, for an investor, it's going to allow them much greater level of detail of what their climate risks and opportunities are. And that's a good thing, especially for our purpose of providing resilient retirement income.

Elena Lambros:

Yeah. No, I would agree with you on that one. I think it is really great to have all of that information available as an investor. So then if I think about that, and there's a lot of talk around regulatory compliance, and then obviously it's talk about AI and innovation technology.

Is there anything particularly around that kind of innovation or technology space that's actually driving sustainable impact at Challenger or anything that you think is particularly exciting that helps you in your job?

Charlotte O'Meara:

Yeah. So there are a few things that we're working on, and we're looking at in terms of innovation and technology. And I think that AI and technology is the focus area, particularly in - Well, in all conversations at the moment, really.

Elena Lambros:

Yes, we can't escape that conversation.

Charlotte O'Meara:

No way. And I think people are talking about this next AI revolution. It will make the industrial revolution look like absolutely nothing. So the change that we're about to face and encounter as a human race really is going to be enormous. But if we bring it back down to the investment level and what we are looking at at Challenger, on the operational side, we have just announced a long-term technology partnership. And that's really been a game changer for us here at Challenger because we are looking to modernise our core systems but also build the digital infrastructure of the future. And ESG is going to be integrated in this overall technology rollout.

So we're really working with other partners internally to really look at how we can integrate ESG in a much better way into our data and systems, which will allow for not only better reporting but what we ultimately want is better modelling of climate scenarios, better access to information for our investment managers because as I mentioned earlier, we've got... we're at a turning point where investment managers are going to have access to more data than they've ever had before that's going to be audited and will be much more reliable. And so we want to be able to bring that to our investment managers in a much easier way. So that's something we're working on at the moment.

Elena Lambros:

That does sound exciting because then you can also... you're really influencing their decisions and their outcomes, right, using that data for that benefit, which is really helpful.

Charlotte O'Meara:

And so what we really want to do to that point is we want them to be looking at all of this data, modelling different scenarios before the investment decision is made because they can then map out what the scenarios, what the different time horizons, what climate risks and opportunities, nature risk, human rights risk, governance risk. We want them to be able to model and map that. So we are really working hard on that. But we're also looking at, in a much deeper way, understanding our climate risk.

So, I think I mentioned earlier the biggest challenge for investors, particularly in the private credit, private equity, venture capital space is access to reliable data for emissions because that just doesn't exist at the moment. So, we're working with our third-party ESG data provider at the moment on working on a solution to get access to more data for scope three finance emissions for private assets. And we've seen some great success in the last-

Elena Lambros:

Oh, have you.

Charlotte O'Meara:

... couple of months where we, for the first time, we've been able to really model a private credit portfolio and what that data might look like, so working with our third-party data providers, innovating around that. And again, it comes back to that collaboration point.

We're really collaborating with our data provider as we're all learning together, but the potential of AI to really change how we are using ESG data and how investment managers are using ESG data to model their scenarios and to make those decisions is something that we're looking at to really build out a much more sophisticated ESG framework.

Elena Lambros:

Yeah. No, that sounds pretty fascinating, actually. And we talk about ESG and AI a lot, and there's quite a lot of comments around the negativity around the use of energy and some issues associated with that type of thing. But I think the solutions that AI can provide around ESG are actually really exciting and quite worth the positive focus and talking about it. So it's great to see that you're doing that.

Charlotte O'Meara:

Yeah, it is really exciting. And I think one interesting point that I read on AI and climate change recently was around the fact that the climate scenarios that investment managers in particular and companies have been using in the past, such as the IPCC scenarios, they didn't actually factor in some of this energy usage of AI, the way that the world has shifted and changed at such a rapid pace. And so, what we really need to do at this point is use AI to come up with much more creative scenarios, for example, to model in the energy use of AI-

Elena Lambros:

Yes.

Charlotte O'Meara:

... because they're not fit for purpose anymore. And so we really need to utilise AI to get the best outcomes for ESG along with everything else, or we're just not going to be able to keep up with the pace of change.

Elena Lambros:

Which would be disappointing in the long run as well.

Charlotte O'Meara:

Absolutely.

Elena Lambros:

So then, have you talked to quite a lot about what you're doing and some of the things that you're working on. What are some of those key lessons that you've learned in your role, and how do you think this has shaped or changed Challenger's approach to sustainability?

Charlotte O'Meara:

The key lesson probably goes back to what I was saying previously around the pace of change. Since I started in ESG, the world looks completely different, and it's always evolving. It's always changing rapidly. And I think what I've learned is you have to be agile to change. You have to be agile to the geopolitical shifts that might then impact your investment portfolios in ways you didn't consider, the technological shifts. The way that even the politicisation of ESG might impact your portfolios, but also our stakeholders view of ESG.

So what our clients are looking for and what our shareholders are looking for changes over time quite quickly. And so, an issue that we might not have had as a material issue might become a really important issue to a client quite quickly. So, we need the systems, the tools, and the capability to be agile enough to shift and meet those changing standards. And I think that that is sort of the core lesson that I've learned in ESG and how we've adapted our ESG framework to be built over time to allow for those shifts.

And so really coming back to looking at what is most material to a sector, but also considering what is something that's forward-looking that might be material to a sector or an asset class is something that we have built into our responsible investment framework and is something that we will be looking at building out even more.

And I think coming back to looking at the enhanced transparency that we're going to start getting around climate disclosures, we're going to have access to better information, really building that into our framework and allowing us to pivot to what is the most material issue and what's most important over time. ESG really is evolving, and we're part of the group that's going to be shaping ESG now and into the future. And so, really responding to that is a key lesson that I've learned.

Elena Lambros:

Yeah. No, that's really great key lesson and probably rolls onto my next question if I'm thinking about what do you see the role of future generations in driving change. And while you're thinking about answering that question, what advice do you give people who are passionate about making a difference in this area?

Charlotte O'Meara:

So future generations, I think that the future generations that are coming up, the young people now that are even the ones that are at school, but they're growing up, they are really unique generation because they're not going to just be the drivers of change in the way that we were.

ESG, sustainability, climate change, it is core to who they are. They've grown up. Just it's a fundamental part of their DNA. It's not the question around "is it important?". It's critical to them. It's just part of life. It's part of the world that they live in.

Elena Lambros:

It's not something that sits aside and someone kind of focuses on.

Charlotte O'Meara:

No.

Elena Lambros:

It's everything they do, it's kind of embedded, right. Yeah.

Charlotte O'Meara:

Yeah, which means... which is fantastic because if they're not asking if sustainability matters, what they're asking is how fast can we make change. How fast can we adapt? How fast can we evolve? And that's really exciting. And so I think that the future generations will be a critical part of how we respond to the world because they're a generation that believe in this, but they're also a generation that are agile, and they are the generation that has grown up with AI that has grown up with this technology in a way that we absolutely haven't.

And so we are seeing this shift at Challenger in how the expectations of our customers, our shareholders, our stakeholders, it's evolving so rapidly because of the younger generations and their influence on the world. And so there's a growing demand for transparency from them. There's a growing demand for ESG. They're asking all the tough questions. They're asking the right questions. And that's ultimately a good thing for companies like Challenger and for the whole market because it keeps companies accountable and it pushes us to evolve and change in response.

And I think my advice to anyone who's passionate about making a difference in this area or making a difference more broadly is just to get started. Get started as soon as you can. Whether you're in finance or you're in technology or you're in law or you're in any field at all, learn about this space, stay curious, ask questions, and surround yourself with like-minded thinkers and don't underestimate the power of collaboration.

That's a key part of my career that it's been really important for me to collaborate with other investors in this space. I think collaborating in partnerships across sectors, geographies, generations, is incredibly important to facing the complex issues that we are facing as a society. And my final piece of advice, and probably this is the most important piece of advice for any ESG or responsible investment professional, is to be persistent.

Because change, it doesn't happen overnight. You will come up against roadblocks. There will be some new regulatory framework, or there'll be something else in your business that's taking priority instead of ESG. But you just need to be patient and keep toiling away and doing the work because you will see incremental progress over time. And it does matter, and it does leave an impact. You just need to stay focused. You need to keep at it. And that's certainly been my experience in my career.

And it's wonderful when you do see the fruits of your labour after being persistent for such a long time, and you actually do see the impact that that can make on portfolios, on a company, on a decision, on a collaboration that you've made. And you see that out in the world, and it's really satisfying. So it's a responsibility I take very seriously, and I would encourage any future generations to just get started and talk to as many people as you can.

Elena Lambros:

I love that. And on that note, we might leave it there. Thank you so much for joining us, Charlotte. I've really enjoyed the conversation.

Charlotte O'Meara:

Likewise. Thank you so much for having me on the podcast. I really appreciate it.

Elena Lambros:

Thank you for listening to this episode of ESG Matters @ Ashurst. I hope you found this episode insightful. To subscribe to future episodes of Game Changers and to hear previous episodes, click on the link in the show notes or search ESG Matters @ Ashurst on Apple Podcasts, Spotify, or wherever you get your podcasts.

And while you're there, please feel free to leave a rating or a review. And finally, to learn more about all Ashurst podcasts, visit ashurst.com/podcasts. In the meantime, thanks again for listening, and goodbye for now.