Super funds weigh up the climate risks

The report surveyed 12 pension funds around the world, with a combined $US2 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 Australian Super 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 policymakers.

Mercer's local head of responsible investing, Helga Birgden, said the incoming carbon tax would help Australian investors see climate risks as "something concrete and relevant to how they think about their current portfolio, and because they are very long-term investors, to think about what these risks are going to mean for them".

Australian Super's chief investment officer, Mark Delaney, said his fund had not changed its strategic asset allocation, saying climate risks "need to be dealt with within the asset class rather than between the asset classes".

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

Mr Delaney said Australian Super'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.

"It depends on the type of asset and its location," he said.

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

The Guardian last week reported that a high-profile coalition of investors, politicians and scientists wrote an open letter to Bank of England governor Sir Mervyn King, warning that the huge reserves of coal, oil and gas held by stock exchange-listed companies were "subprime" 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 2 degrees, but meeting this limit would mean just 20 per cent of existing fossil fuel reserves could be burnt.

They urged Sir Mervyn, as chairman of the financial policy committee, to investigate the risk of a "carbon bubble".