SUPERANNUATION funds, including the $42 billion industry fund Australian Super, are beginning to factor climate risks into investment decisions, according to a report by actuarial firm Mercer.
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".
Frequently Asked Questions about this Article…
What did Mercer's report find about super funds and climate risks?
Mercer's report surveyed 12 pension funds with about US$2 trillion in assets and found climate risk is being taken more seriously: climate could account for around 10% of typical portfolio risk, Mercer suggested funds should consider up to 40% of their portfolios in so‑called "climate sensitive assets," and more than half of the surveyed funds had started to include climate change in risk management or strategic asset allocation.
How are Australian super funds like Australian Super responding to climate risks and the incoming carbon tax?
According to the article, Australian Super has not changed its strategic asset allocation but has analysed the carbon exposure of its portfolio (excluding bonds and cash) and engaged with fund managers on security selection across shares, property and infrastructure. Mercer’s local head of responsible investing noted the carbon tax helps investors see climate risks as concrete and relevant to long‑term portfolios.
Are super funds changing their asset allocations because of climate change?
Mercer found about half of the 12 surveyed funds had changed or planned to change their asset allocations in response to climate risks. Other funds, like Australian Super, have chosen to address climate risk within asset classes rather than by moving between different asset classes.
Are super funds engaging more with companies and policymakers about climate change?
Yes. Mercer reported that roughly 80% of the surveyed funds had, or planned to, increase their engagement on climate change with companies and policymakers, signalling growing active involvement rather than only passive portfolio changes.
How could climate change affect property and infrastructure investments in a superannuation portfolio?
The article says the impact depends on the asset type and location: infrastructure assets may face higher risks from fire, flood and similar events, while property values are already shifting as tenants show green preferences. Australian Super noted the market had moved on green preferences even before policy changes.
What is the 'carbon bubble' risk mentioned in the article, and why might investors worry?
The article cites a coalition of investors, politicians and scientists warning the Bank of England that large reserves of coal, oil and gas held by listed companies may be "subprime" assets—potentially mispriced—because meeting agreed UN emissions limits would mean only about 20% of existing fossil fuel reserves could be burned. That mismatch creates concern about a possible "carbon bubble" and systemic risk to markets.
How large a share of portfolio risk could climate represent, and what allocation did Mercer recommend?
Mercer’s earlier analysis suggested climate could account for about 10% of a typical portfolio’s risk, and recommended that funds consider allocating around 40% of a portfolio into climate‑sensitive assets to address those risks.
Which superannuation funds were included in Mercer's survey?
The survey covered 12 pension funds around the world with a combined US$2 trillion in assets. The article specifically mentions that Australian Super and VicSuper were among the funds Mercer reviewed.
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