Funds using climate risks in asset decisions

The report surveyed 12 pension funds around the world, with a combined $US2 trillion ($1.9 trillion) in assets, to identify what follow-up actions they had taken since Mercer found last February that climate could account for 10 per cent of typical portfolio risk and that funds should invest 40 per cent of their portfolio into so-called "climate-sensitive assets".

Of the 12 funds, including AustralianSuper and VicSuper, Mercer found: more than half had decided to include climate change considerations in future risk management and/or strategic asset allocation processes half had changed or planned to change their asset allocations and 80 per cent had or would increase their engagement on climate change with companies and policy makers.

The chief investment officer of AustralianSuper, Mark Delaney, said his fund had not changed its strategic asset allocation and that climate risks need "to be dealt with within the asset class rather than between the asset classes".

But AustralianSuper had analysed the carbon exposure of its portfolio (except for bonds and cash) and engaged with fund managers responsible for security selection across shares, property and infrastructure.

Mr Delaney said AustralianSuper's analysis showed the impact of the carbon tax on the value of listed equities was small and it was too early to tell which of $5 billion in infrastructure assets would be hardest hit by increased risks of fire, flood and so on.

In property, Mr Delaney said the market had moved "well before the policy framework has changed" and the value of buildings was already shifting due to tenants' green preferences.

The Guardian reported last Thursday a high-profile coalition of investors, politicians and scientists wrote an open letter to the Bank of England governor Sir Mervyn King, warning that the huge reserves of coal, oil and gas held by stock exchange-listed companies were "sub-prime" assets that were potentially mispriced and posed a systemic risk to economic stability.

At December's United Nations climate change summit in Durban, 194 nations agreed to enact legally binding curbs on greenhouse gas emissions within three years to limit global warming to two degrees, they wrote, but meeting this limit would mean just 20 per cent of existing fossil fuel reserves could be burned. They urged Sir Mervyn, as chairman of the financial policy committee, to investigate the risk of a "carbon bubble".

Deutsche Bank analyst Tim Jordan said the market capitalisation of ASX 200 companies engaged predominantly in fossil fuel exploration and production was nearly $70 billion - and much more if BHP Billiton and Rio Tinto were included - but no analysis had been done in Australia of the market value of attributed fossil fuel reserves.