Apr 27, 2015 - 4:57pm
This article first appeared in ABC's The Drum on 27 April 2015.
CEO, The Climate Institute
Australian investment managers have a mixed record when it comes to managing climate and carbon pollution risks.
An index of how the world's top 500 superannuation, sovereign wealth and insurance funds manage these risks was released this morning. The latest Asset Owner's Disclosure Project (AODP) index reveals how some of our superannuation funds are making world-leading efforts to invest for the future, while others appear to be hoping that the whole "climate change" thing will go away.
Australia's Local Government Super came top of the worldwide index. It's one of just nine asset owners who received a "AAA" rating. Australian Super, the country's biggest superannuation manager, also attained this level.
Australia received a "B" rating overall when AODP aggregated the mean scores of each country's funds, placing us second behind Norway, which scored a "BBB".
On the face of it, then, Australia is doing relatively well.
But sadly, it's nowhere near enough. Most Australians' retirement nest eggs are still financing the sorts of polluting projects that the world increasingly is turning away from.
Many would have no idea that their hard-earned retirement savings may be funding investments in coal mines and power stations. Last week, Essential Polling found a minority of Australians backed their superannuation going into fossil fuels, while 80 per cent support renewable energy investments. Very few would get a breakdown from their fund on these investments. Globally only 7 per cent of funds even calculate the carbon footprint of their investments.
Australian funds like Telstra Super and the Retail Employees Super Trust, as well as Australia's Future Fund, scored Ds or Xs in the AODP Index for their lack of transparency or attention.
There is a clear-cut case that asset owners and investment managers - especially those with a long-term mandate - need to carefully consider carbon and climate change as a financial risk.
Some of this financial risk arises from what's commonly called "stranded assets". Work by UK-based Carbon Tracker Initiative has identified that the vast majority of the world's fossil fuel reserves cannot be burnt if the world is to meet the internationally agreed goal of avoiding 2 degree warming above pre-industrial levels.CSIRO has already highlighted Australia is feeling costly impacts
from greater storms, bushfires and heatwaves at just one degree warming. Similar impacts are being felt worldwide so the incentive for action, and its benefits, is accelerating.
Action is building on numerous fronts. Outside of Australia clean energy and carbon constraint policies are growing. The costs of alternative technologies are plummeting. Social pressure through local campaigns and the divestment movement is escalating.
And yet much of these reserves remain on the books of companies in which many of us are invested through our super funds. What happens when markets realise that the value of those assets can't be realised? If there is a rush to the exit from companies and projects that are exposed to these risks, will your fund get out of the door in time?
Stranded assets are just one form of climate risk. There are risks from climate change itself; such as damage to key infrastructure and investments.There are potentially numerous secondary effects: what might concerted global climate action mean for Australia's long-term economic performance? Most funds are heavily invested in Australian assets.
Trustees and others charged with managing retirement funds have a "fiduciary duty" to look after the "best interests" of those they're investing for. Us. It's become clear that this now includes a requirement to carefully consider these risks, but action is mixed.
With growing public campaigns and crucial international climate negotiations in Paris looming at the end of 2015, the last twelve months saw many positive announcements from funds and their industry associations.
However the AODP Index looks past announcements to action.
Over the last year only 1.4 per cent could demonstrate they decreased the carbon intensity of their investments. Almost half of the 500 funds rated received an "X" rating for having no information available at all.
But there are signs of hope that we could be reaching a tipping point in the gambles being taken with our retirement nest eggs and future prosperity.
Top rated funds are beginning to protect their investments through strategies including engaging with the companies in which they own shares, divesting of heavily carbon-exposed assets, or deploying hedging strategies. A global investment architecture of climate bonds and low carbon investment registers is emerging.
Indeed if all funds invested as the "AAA" funds did we would be well on the way to tackling the risks and grabbing the opportunities of our climate change challenge. Achieving that outcome will require considerable improvement from those who manage our retirement funds, and increased attention to their management from us. More than our retirement is at stake
John Connor was CEO of The Climate Institute from 2007 to March 2017. Whilst qualified as a lawyer, John has spent over twenty years working in a variety of policy and advocacy roles with organisations including World Vision, Make Poverty History, the Australian Conservation Foundation and the NSW Nature Conservation Council. Since joining The Climate Institute in 2007 John has been a leading analyst and commentator on the rollercoaster that has been Australia’s domestic and international carbon policy and overseen the Institute’s additional focus on institutional investors and climate risk. John has also worked on numerous government and business advisory panels.