John Hewson: Climate change the next sub-prime meltdown

John Hewson, former leader of the Coalition, sees climate change as a risk equivalent to the sub-prime loans meltdown for which super funds are dangerously exposed.

Over the Carbon Expo I managed to catch-up with John Hewson, the former leader of the Coalition in the lead-up to the “unlosable” 1993 Federal Election. I was hoping we might talk about the carbon tax scare campaign given he knows a thing or two about political scare campaigns, but he was so passionate about the risks presented by climate change for the finance sector that we ran out of time. 

What many people may not realise is that after Hewson fell victim to the mother of all scare campaigns (before Abbott topped Keating with the carbon tax), he became active in trying to raise capital for businesses and technologies in carbon abatement, building on his earlier career as an investment banker. John Hewson has now taken up the Chair of the Asset Owners Disclosure Project, an initiative aimed at getting retirement and superannuation funds to pay more heed to the risks of climate change and the need to invest more money in companies that reduce carbon emissions.

In the interview John Hewson makes some pretty interesting points.  In particular he equates climate change as equivalent in its likely impacts on financial markets to that of the sub-prime loan crisis that led to the GFC.  He also points out that governments are across the globe are subsidizing carbon intensive industries, and board members can longer afford to turn a blind eye to the risks associated with investing in these industries.


TE: John, could you tell us a little bit about the Asset Owners Disclosure Project and what you’re hoping to achieve?

JH: Well, I think that one of the key things was how the low carbon alternatives were going to be developed; the industries and technologies… and so on and one of the main constraints in those investments is that it’s very hard to get some of these alternative projects off the ground. I mean I spent 10 or 15 years developing all sorts of companies that are notionally in a position to benefit from a response to climate change and household garbage recycling and biofuels, green garden centres, energy efficient light bulbs and a lot more. And the hardest thing is to get money or sustain money while we prove them up and get them to adequate size where their profitability is proven and business model works… So, what we’ve decided to do is work at the asset owner level and we’re working from the top down and the bottom up to try and generate a flow of investment funds to these low carbon industries. 

If you look at the top 1,000 superannuation, pension funds, life insurance companies and sovereign wealth funds, some endowment funds, each of those wouldn’t manage more than about $5 billion.  Five billion dollars is probably the base, but collectively they manage about $US60 trillion or more worth of funds. They own 63 of them. They account for more than 50 per cent of the listed companies of all the stock exchanges of the world and they invest about 55 per cent of that money in carbon intensive industries and only about 2 per cent your low carbon alternatives. 

So, if we could get that number up to maybe 5 or 6 per cent, then of course there would be enough cash in the system, investment to fund the response to climate change and develop these industries’ technologies. A lot of them you can’t really specify because you don’t know how the technology will evolve and unfold and so on.

So, top down we’re rating them [the asset-owners]. We’re surveying them first, asking them how they’re managing climate risk and why they’re investing in carbon intensive industries or how they are investing and what percentage in what industries. 

And from the bottom up we’ve got a social media platform called Vital Few. We’re facilitating fund members to contact their directors or trustees, whatever their structure is by country, asking them questions about how they’re managing climate risk and why are they investing so little in these alternatives?

So, we reckon top down and bottom up… Top down we’ll actually survey them and rate them and the rating will be published in November.

And from the bottom up we think that they have a duty, a responsibility to answer those questions and when they get some of those questions we know from experience they go to boards and sort of say well what are we doing about it, you know and you can drive the bottom from the top down and the bottom up.

TE: Is it a bit like the Carbon Disclosure Project, where listed companies were being asked to answer questions around carbon emissions and risk?

JH: The interesting thing is, you know, the asset owners, the investor groups, some of them are represented here I notice [at the Carbon Expo], have given us pushback on this and the irony is here they’re demanding transparency and accountability from the companies they invest in. But they’re not prepared to apply the same level of transparency and accountability to themselves – and I don’t think that’s a sustainable position. You can’t continue to defend the indefensible. I think the average beneficiary or member of a fund wants to know where they money is going and why it’s going there. You’ve got pressure in the domestic market here. 

People don’t want to know what sector the money is in, which is what the superannuation industry is trying to sort of constrain it to. They’ll tell you it’s in resources or tell you it’s in services or something, or manufacturing or whatever.

But superannuation members want to know whether it’s in BHP or Westpac or wherever. They need that information and it’s only a matter of time I think before that transparency is generated as a result of this process and other pressures and in that context people will ask legitimate questions.

Your asset owners have got a different perspective to the asset managers. And the asset managers focus on quarterly reports, relative to the index, that sort of thing, but the asset owners’ responsibility, the fiduciary responsibility is to manage those funds to the long-term benefits of the members. You can’t tell me that the risk of a catastrophic climate event in the next seven decades isn’t a substantial portfolio risk and that you have a responsibility as a trustee or a director to manage that.  If that’s the case, what are you doing about it and how are you managing it? 

They’re reasonable questions to ask. Also in a portfolio sense they don’t have too many options, they can’t really sort of lay it off the financial market or derivatives market – there isn’t one. They can’t actually insure it.

But they can change the mix of their investments and the more they put in low carbon intensive investments relative to their high carbon intensive investments, they’re spreading their risk. They’re managing their portfolio risk…

TE: I suppose their counter argument to you, John, would be, ‘well this isn’t our responsibility at the moment… the policy settings are such…’

JH: No, but they have legal responsibilities. There’s a fair bit of work now emerging in this Baker and McKenzie report that just came out [See this Climate Spectator article on this report]. But there was a lot of recognition of long-term fiduciary responsibilities and I was at a session yesterday where a guy quoted the legislation in Australia where their sole responsibility as an asset owner is to the long-term benefit of the superannuants.

You can’t tell me that you can ignore longer term risks or medium term risks in making that sort of allocation, so the asset owners’ perspective is different to the fund managers’ perspective. And notoriously financial markets are under price risk. I mean look at subprime lending. CDOs, they under price risk. Ratings agencies call them AAA when they had a little tranche of AAA in the CDO. 

Governments are subsidising high carbon intensive industries globally in almost every country and that’s what’s got to change. It’s another way of changing behaviour. While you’re having a debate over here about carbon pricing and instructions to achieve that outcome, you can actually drive the investment dollar where it’s got to go. You know, it’s all part of a complete response to climate change.  I think some direct action measures are important, some mandating is important as well as having your carbon price. You get a quicker reaction.

TE: I suppose the challenge though for an asset owner is they’re sitting there and saying well I could put money into these other things or I can pull them, but in the end I’ll lose money that I could then reinvest later in low carbon alternatives once regulation starts to change?

JH: Well, not necessarily. There’s been a fair bit of work done on comparing these things and the ethical fund… It’s a pretty broad area and not terribly well defined, but you can argue…

TE: I mean some ethical funds often still invest in very carbon intensive assets.

JH: You can argue that where they’ve taken low carbon risks, they haven’t performed any less well and in many cases they’ve performed better than those who’ve ignored it. A fellow from ANU yesterday that came along to a session at Carbon Expo was making this point from research they’ve been doing.

TE: But I mean if you look at say how well the renewables companies have been doing in the last two years, if I’d put all my money into solar companies, I’d have lost my shirt.

JH: Well, it’s that’s long-term horizon, so you need long-term capital too, longer term investments. We used to have these things. People used to think this way. There’s been an enormous move to short-term, you know, returns which are not in the interests of a superranuant.

But as an example, that’s how some funds responded to the risk from sub-prime loans.  I could see there was a real risk from sub-prime lending and so could others in the investment industry and I said to people in the industry, ‘look the bloody financial system is going to implode and these debt structures are unsustainable; I don’t know how it’s going to work, but the bottom line is it’s going to hit the stock market, it’s going to hit the property market and hit them bad, so we’ve got to get out’. 

And, you know, the asset managers in, the fund managers are saying ‘oh no, no, no,  just underweight this and overweight that, you know, and rebalance your mix and you’ll be fine’. 

But no, no.  If the shit it hits the fan and the market falls by fifty per cent, I’m going to lose fifty per cent.  I might lose a little bit less than fifty per cent because I got my weightings right, but I’m going to lose fifty per cent.  I don’t want to be there.  I’d rather sit over here in, you know, a term bank deposit at six per cent.  That’s the only way to preserve members money in such a situation.

TE: It’s got to take balls though to make a decision like that?

JH: But you had to make a decision like that when confronted with that level of risk and I don’t see it any different really to climate… There’s a risk that… You go back to the middle ‘80s when a lot of this climate science was emerging.  They didn’t make any specific predictions about, you know, ice caps or anything.  The early predictions were you have a greater number with greater intensity of extreme weather experiences, climate events.  And that’s happening and it’s accelerated.  So, I mean if you were looking at it in a realistic sense, that’s a risk.  You quantify the risk in terms of yourself, your assets, your portfolio, your position, your country, whatever.  That’s what boards have to do.  You can’t turn a blind eye to it.

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