Oct 14, 2014 - 8:00am
This article was first published in The Age and in the Canberra Times on 14 October 2014.
Deputy CEO, The Climate Institute
Something very significant is happening in the financial world. It's waking up to genuine climate and carbon investment risks and this money is beginning to talk.
The Rockefeller Brothers Fund, derived from the world's biggest and best known oil baron, is refusing to invest in fossil fuels. Stanford University announced in May that its endowment funds wouldn’t directly invest any more in coal companies. Norway's sovereign wealth fund, the world's largest, is reviewing its stand and will report back early next year.
Here in Australia, large super funds HESTA and LG Super have in the past month announced portfolio-wide decisions to quit or curtail their coal investments. Deutsche Bank, Barclays and HSBC have refused to provide loans for the Abbott Point coal port in the Great Barrier Reef Marine Park without UN support. The ANU has said that it will shelve its holdings of seven Australian resources companies. October 18 is "Divestment Day".
Unsurprisingly, divestment campaigns are also fast becoming enemy number one for Australia's resources industry. Current and past government ministers are asking investors who are starting to act (even incrementally) on carbon risk to “explain themselves”. Editorials in The Australian and the Australian Financial Review —papers that could previously be relied upon to unfailingly argue in favour of freedom of choice in markets -- thundered that ANU's investment decisions were irresponsible.
The complaints are a bit rich. All of us are required by law to become investors through our superannuation: it's our money, after all. It’s hard to imagine a legitimate criticism of the notion that we all take an active interest in money that's invested on our behalf.
The bigger problem for the scandalised defenders of fossil fuels is that the horse has already bolted. Climate and carbon risks are fast becoming a mainstream concern on financial, not ethical grounds.
No-one can really say what the next few years, let alone decades, will bring for investors. But there's one thing we can be reasonably certain will loom ever larger: human-induced greenhouse gas emissions are changing the earth's atmosphere in a way that's already affected global climate patterns. Due to lagging effects, it's going to get worse.
In 2011 Carbon Tracker, a UK-based think tank, released a report which found that only about a fifth of global fossil fuel resources can be burned if the world is to maintain a good [80 per cent] chance of limiting global warming to 2 degrees Celsius -- a level that over 190 countries have agreed needs to be avoided is we are to be spared the worst impacts of climate change. This approach was adopted by the International Energy Agency the following year.
Yet much of the remaining fossil fuel resources are sitting on the books of listed companies, contributing to the price of their shares, which most of us own through our superannuation.
Investors in Australian stock markets are particularly exposed to the carbon risk through the local stock market's heavy resource bias; particularly in coal. Research by The Climate Institute and Carbon Tracker shows that if we burn the Australian coal resources of listed companies, we would eat up around three-quarters of the global coal budget that is consistent with avoiding 2 degrees of warming. In other words, Australia is quite vulnerable to a "stranded assets" scenario in which previously valuable reserves become worthless.
On that basis it's very likely that some Australian coal assets, in which many of us have a stake, will have to be written off. It's hard to say how -- although we note that a survey in 2012 found that Australian utilities, while expecting the previous government’s carbon pricing scheme to be repealed, still expected that Australia would have some kind of carbon pricing in place by 2020. It's not just carbon pricing: plummeting renewables costs, China's slowdown and efforts to control air pollution, US regulations and shale gas have all made coal a bad investment for several years now.
Until recently the majority of investors -- from mums and dads to giants of fund management - underplayed or were unaware of these risks.
That's changing, however. Investors representing almost half a trillion US dollars’ worth of assets last month signed a pledge in Montreal to "carbon footprint" their equity portfolios. This is a first step towards decarbonising their portfolios.
It's not our role to say how investors could or should move towards decarbonisation. Straightforward divestment may not be the best choice for all. Some coal and oil will still be used in products from steel, to plastics, to aviation fuels, barring some truly extraordinary technological breakthrough. But it's past time for any responsible investment manager to assess and disclose the climate risks of their holdings. They can do this through processes such as the Asset Owners Disclosure Project, our sister organisation which annually ranks the world’s largest asset owners, most of them super funds. That ranking is rapidly becoming an international yardstick.
Of this we can be fairly sure: investors counting on a "business as usual" strategy which fails to seriously consider climate and carbon risks will find their funds are not only at risk of damage to their image, but to their returns. Investment consultants and fund managers who aren't considering long-term trends are not the sort you want to trust your retirement with.
Erwin is Deputy CEO of The Climate Institute. With nearly 20 years practical experience in climate change policy
and research, Erwin has developed and led many national and
international programs aimed at reducing greenhouse pollution. This work
has been undertaken in Australia, Europe, North and South America, the
Pacific and Antarctica. He has represented non-governmental groups and
advised government and business in national, regional and international
fora, including being a non-governmental expert reviewer of the reports
of the UN’s Intergovernmental Panel on Climate Change. Erwin has written, researched and produced many
publications on climate change and energy policy including a number of
review papers in scientific journals such as the Medical Journal of