Analysis of performance criteria
Operating result: The operating result for 2018–19 was $159 million, strongly ahead of the target of $92 million and an improvement on the prior year. The strong operating result was driven by growth in the overall portfolio, leading to higher revenues, with operating expenditures slightly lower than planned.
Portfolio benchmark return: The core portfolio cumulative return from inception to 30 June 2019 was 5.29 per cent against a benchmark of 5.39 per cent to 6.39 per cent. This was favourably impacted by 0.72 per cent attributable to fair value gains on bonds and loans arising from the fall in market interest rates. Normalising for this, the core portfolio normalised to 30 June 2019 was 4.57 per cent. The Clean Energy Innovation Fund cumulative return from its inception to 30 June 2019 was negative 27.05 per cent against a benchmark of 3.22 per cent. Returns from investments in early stage ventures in the Clean Energy Innovation Fund are highly volatile in nature and negative returns in the early years are not uncommon. Operating expenditure before concession and impairment as a percentage of the deployed portfolio balance was 1 per cent versus a target of less than 1.5 per cent.
Capital committed: New investment commitments of almost $1.5 billion were made during 2018–19, ahead of the target of $1 billion. Commitments were made across 30 transactions, including new commitments of $940 million in renewable energy and $524 million across a broad range of energy efficiency and low emissions investments and projects.
Capital deployed: Total capital deployed in 2018–19 was $1.3 billion, ahead of the target of $1 billion. As with capital committed, this result was lower than the prior year of $2 billion, which was influenced by record levels of investment sector-wide.
Financial leverage: In order to increase the flows of finance into the clean energy sector, it is important that others also invest in the sector. At the transaction level, we measure this through financial leverage. Actual leverage in CEFC transactions in 2018–19 saw more than $3 in private sector capital invested for every $1 of CEFC finance committed, in advance of the targeted $2:$1.
Contribution to emissions reduction: Our investment commitments in 2018–19 made a positive contribution to Australia’s emissions reduction efforts, with new commitments in the year forecast to reduce emissions by 2.9Mt CO2-e per year, against a target of 1.9Mt CO2-e per year. As a specialist investor, we expect to achieve positive returns for each tonne of CO2-e abated by investees, projects and businesses. For investment commitments made in 2018-19 we expect each tonne of CO2-e abated by investees, projects and businesses to generate a positive return of $4.70 per tonne for the CEFC.
Develop markets in new sectors, technologies and geographies: In 2018–19 the CEFC executed a number of first-of-a-kind transactions across a diverse range of investments and projects, reflecting our focus on building investor confidence in new clean energy opportunities. These included finance for the Avertas Energy energy-from-waste facility in Western Australia; deployment of hybrid inverter technologies; finance for Australia’s first residential build-to-rent fund; support for household storage and solar in South Australia and our new Warada Capital joint venture with ICA Partners (previously Ironstone Capital Advisory). We contributed to market development through our research and thought leadership activities, delivering these insights alongside leading industry associations, including the Clean Energy Council; Energy Efficiency Council; Australian Industry Group; Property Council of Australia; Climate Bonds Initiative; Bioenergy Australia; Carbon Market Institute; Smart Energy Council; and the National Farmers’ Federation.
Build asset and capital management capability: The role of Chief Asset Management Officer was established during the year, and a new Asset Management Framework introduced to foster closer interaction between the CEFC Investment and Portfolio Management functions. We also progressed our Capital Management Strategy and were pleased to receive ASIC approval for an Australian Financial Services Licence (AFSL), to facilitate our ability to develop a range of debt and equity related products. We also executed our first asset sell down, demonstrating our ability to implement capital recycling.
Business systems enhancements and security: Phase one of the enterprise information management project was delivered in 2018–19. This included transaction process mapping; the establishment and operation of an Enterprise Information Management working group and the implementation of an Information Governance Strategy and policies. We also further developed the functional requirements for information management systems, including a deep dive systems analysis and the mapping of specific business processes. We were pleased to achieve an uplift in cyber resilience during the year, as reflected in the independent assessment of a targeted score of 2.5 under the National Institute of Standards and Technology (NIST) standard.
Design and implement a refreshed People and Culture strategy to strengthen engagement and build an inclusive, high performing workplace culture: A refreshed People and Culture strategy was endorsed by the Board People and Culture Committee in 2018–19, with several major initiatives implemented during the year. These included the introduction of new organisation-wide Values (see page 57). We automated the KPI management process and were pleased to introduce purchased leave benefits and a staff wellbeing program. The CEFC Variable Compensation Plan was revised during the year, with clearer messaging around risk behaviours and a stronger performance-reward link. Strong employee engagement survey results were achieved in an independent survey of staff, with overall engagement at 83 per cent (+9 per cent) and alignment at 76 per cent (also +9 per cent) on the previous survey results. These scores moved the CEFC into the top engagement decile compared with benchmark organisations.
Design and implement a refreshed brand strategy to further our ability to unlock investable opportunities in the clean energy sector: The CEFC has a specific role in encouraging additional private sector entities into new investments in clean energy technologies across multiple sectors, businesses and projects. The impact of our activities is influenced by market awareness about our role and expertise, and the strength of our reputation in initiating and delivering transactions. After six years of investing, we drew on the insights of a wide range of external and internal stakeholders to assess our external engagement activities in 2018–19. This initiative also informed the refinement of the CEFC Values in 2018–19, to more closely reflect the commercial and emissions ambitions of the organisation and the broader market. These insights have informed our broader branding and market engagement activities, including a heightened focus on delivering market research into clean energy trends. In response to market interest, we are also increasingly working with our counterparties to share practical insights about their emissions and investment achievements, particularly where these have benefited from CEFC finance. See Figure 18.