Super funds at the mercy of climate change Opinion Article

Sep 26, 2010 - 11:00am

This was originally published in the National Times on 24 September 2010.

By Julian Poulter, Business Director, The Climate Institute

Just one week after the world's biggest miner belled the cat saying Australia's economic competitiveness was at risk by delaying action on pricing pollution, Australia's first climate change shareholder resolutions have been launched by the innovative Climate Advocacy Fund.

BHP chief executive Marius Kloppers highlighted that Australia has the most emissions-intensive electricity industry in the OECD but we also have one of the most emissions intensive stock exchanges in the world. As a result, Australia's superannuation funds, who own about a third of the ASX, are more exposed to climate change than any other superannuation industry in the world. To protect our retirement nest eggs, the long-term returns of the superannuation funds, it is clear the funds should be vitally interested in the carbon competitiveness plans of the companies they own on our behalf.

Fortunately there are some positive signs as Australia's superannuation funds have a higher proportion of signatories to the Carbon Disclosure Project (CDP) and the UN Principles for Responsible Investment (PRI) than any other country. Therefore it is hoped that the resolutions being posed by The Climate Advocacy Fund, launched by Australian Ethical Investment this week, with The Climate Institute as a key partner, will attract strong institutional support. Certainly this is an opportunity for those superannuation funds to demonstrate their commitment to the principles they have signed up to.

The Climate Advocacy Fund differs from "green" funds, which typically invest in renewable energy, low-carbon assets. The fund is using its ownership of carbon-intensive companies to influence their behaviour and launch Australia's first climate change shareholder resolution. This, and the dual objective to match, or better, the return of the ASX 200, makes it the first of its kind in the world.

The fund will be used to create a model for active ownership around climate change. The resolutions will request that companies not only respond to the CDP, the world's leading database of company emissions, but detail emission reductions strategies to avoid the worst ravages of inevitable sting of a high carbon price that the International Energy Agency estimate may reach more than $100/tonne by 2030.

Critically, the third resolution focuses on capital investment assumptions. For some time now, those looking at the high emissions risk sectors have been suspicious of the assumptions used to justify large long term capital investment. These sectors are the most capital intensive in the world and build assets lasting 40 years or more. The owners of those companies have members with an average investment view of 20 years. Despite this, the management of those companies still mostly have salary and share bonuses based on annual performance – an obvious clash.

At $100 per tonne, many of these investments simply do not stack up over the length of their life. While focusing on the climate risk, the Climate Advocacy Fund goes to the heart of the type of systemic risk that generated the sub-prime crisis – whole sectors underpinned by false long term assumptions than in hindsight seem naive.

The selected companies of the Climate Advocacy Fund resolutions are merely the first wave. Once asset owners use their might to send a message, Australia has the opportunity to become the first country with 100 per cent of its listed companies responding to CDP as other companies look to avoid resolutions themselves. Emissions reduction strategies are a more complex issue and it is critical that shareholders get companies thinking strategically about them. As for the capital investment assumptions, large scale energy and fossil fuel extraction assets are going to have to be justified over much shorter periods of time, accountants and banks will have to place bigger risk premiums on them.

After all, as the recent Gilding/Preston report shows they only have until 2024 to use up their emission budget before they turn the tap off completely so it is time to start turning their ship before their profits and our super falls into disarray.

Julian Poulter

As Business Director at The Climate Institute, Julian is responsible for projects in the business sector, with several of the initiatives focused on investment and finance. He is a highly experienced business professional, with his primary experience in strategy and change consulting combined with several CEO and director roles. He is currently a director of several firms, a business lecturer at Sydney University and is passionate about the ability of the free market to accelerate climate change solutions.

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