Funds must factor in climate change

ONLY the finance sector has enough power to take on Australia's resources industry, but will it? We have one of the world's largest retirement savings pools and sitting atop that pile of money are the super fund trustees who invest money on our behalf.

By InvestSMART · 12 Feb 2011

By InvestSMART ·
12 Feb 2011

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They are supposed to have a long-term investment horizon. As Regnan's managing director, Erik Mather, says, it's about matching assets and liabilities.

"The average working Australian is just under 38. It's going to be at least 22 years before they can access their super. The average Australian is going to live until they're 81. So you're talking about a 43-year timeline to save for your retirement. Very few people are willing to say there is no chance of climate change risk occurring over [that] horizon. We've got to be taking carbon into account."

This week the Climate Institute and Australian Institute of Super Trustees launched its third climate change survey, sent to every super fund larger than $300 million. Its Asset Owners Disclosure Project is supported by everyone from GetUp! to Greenpeace.

Asset owners, it says, must recognise that climate change is an investment risk with a unique profile: "For the first time there is a long-term risk that also has high certainty and high impact."

With carbon prices forecast to hit $US50 a tonne by the end of the decade, it's an increasingly urgent question for Australian super funds who may find up to 40 per cent of their investment portfolio is concentrated in high-risk sectors. "A large proportion of this exposure [is] in capital-intensive assets that have lifespans of up to 40 years," states the institute's survey methodology.

There are huge implications for asset allocation and traditional portfolio theory. The methodology cites Norway's giant Government Pension Fund - Global, which has set itself a 5-6 per cent allocation to low carbon assets as a hedging strategy. In Australia, an equivalent policy would represent billions of dollars flowing into the clean tech sector. We're going to need it.

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Frequently Asked Questions about this Article…

Why should Australian super funds factor climate change into their investment decisions?

Super fund trustees manage one of the world’s largest retirement savings pools with very long investment horizons (the article notes an average working Australian faces about a 43-year timeline to retirement). That long-term horizon means climate change is a material investment risk with high certainty and potential high impact, so funds need to take carbon and climate risks into account when matching assets and liabilities.

What did the Climate Institute and Australian Institute of Super Trustees survey ask of large super funds?

They launched a third climate change survey, sent to every super fund larger than $300 million, as part of the Asset Owners Disclosure Project. The survey aims to gauge how asset owners recognise and disclose climate change as an investment risk.

How could rising carbon prices affect super fund portfolios?

With carbon prices forecast to hit US$50 a tonne by the end of the decade (as quoted in the article), portfolios concentrated in high‑risk, carbon‑intensive sectors could face material value impacts. The article warns some super funds may have up to 40% of their portfolios in those higher‑risk sectors, many of which are capital‑intensive with asset lives up to 40 years.

Which types of assets are most exposed to climate and carbon price risk?

The article highlights exposure concentrated in high‑risk sectors, particularly capital‑intensive assets in the resources industry and similar industries. These assets often have long lifespans (up to 40 years), which makes them sensitive to long‑term carbon and climate policy shifts.

How can super funds use low-carbon allocations to hedge climate risk?

The article points to Norway’s Government Pension Fund Global, which has set a 5–6% allocation to low‑carbon assets as a hedging strategy. Adopting a similar policy in Australia would likely direct billions of dollars into the clean‑tech sector and reduce exposure to carbon‑intensive assets.

Why is the finance sector seen as having power to influence Australia’s resources industry on climate issues?

Because the finance sector — led by super fund trustees who invest on behalf of retirees — controls a very large pool of retirement savings. That concentration of capital gives finance the power to shift investment flows and influence corporate behaviour in the resources industry and other carbon‑intensive sectors.

What are the implications of climate risk for traditional portfolio theory and asset allocation?

The article says there are huge implications: climate risk challenges assumptions about diversification and long‑term asset returns. Large exposures to carbon‑intensive, long‑lived assets may require rethinking allocation and increasing hedges such as low‑carbon investments to protect long‑term retirement outcomes.

What is the Asset Owners Disclosure Project and who supports it?

The Asset Owners Disclosure Project, referenced in the article, encourages asset owners to recognise and disclose climate change as an investment risk. The project is supported by a broad range of organisations, from GetUp! to Greenpeace, and underpins the Climate Institute/AIST survey of large super funds.