The importance of protecting the more than $1.6 trillion invested in Australia’s retirement funds from the risks associated with climate change has been highlighted in a new report, which has revealed that few superannuation fund trustees can demonstrate they are acting on their fiduciary duty to manage for climate and carbon policy risks.
Climate Smart Super: Understanding Superannuation & Climate Risk, released on Wednesday by The Climate Institute, offers information for individuals to learn more about their super funds and how to engage with them on the investments made on their behalf.
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“This report reviews superannuation in the context of climate change – both in terms of how retirement savings might be exposed to climate risk and how those savings can help transition Australia to a clean energy future,” said Climate Institute CEO John Connor.
“It offers a number of simple steps to assist people to engage with their superfunds so that they can move from being accidental to active investors and start challenging the dangerous short term focus in business and politics that threatens retirement savings.”
The report’s release coincides with that of a global survey of the world’s 1000 largest asset owners, which finds that retirement funds worldwide are largely exposed and ill-prepared for the predicted re-pricing of carbon, let alone climate risk, with the casualties being ordinary “citizen investors” and their retirement nest eggs.
The Asset Owners Disclosure Project’s 2013/14 Global Climate Investment Index – its second ever – paints a picture of a global investment system that is capable of driving the low-carbon transition, but which has a way to go yet.
The challenge, says the report, “is that the carbon dioxide emissions potential of the coal, oil and gas reserves listed on the world’s stock exchanges today is already greater than that level of emissions which complies with the global carbon budget for the next 40 years.”
There real possibility, says the report, is of “global asset owners being caught in a carbon bubble in a carbon constrained world. Under this scenario many investments in the asset owners’ portfolios would become ‘stranded’; that is, they would become obsolete or non-performing. These stranded assets would impact returns to assets under management by the asset owners.”
The index was built following information requests to over 800 pension funds, 80 insurance companies, 50 sovereign wealth funds and 30 foundations/endowments; collectively responsible for managing more than $US70 trillion. The survey focused on five main categories: transparency, risk management, investment chain alignment, active ownership and low carbon investment. It includes asset owners from 63 countries, in all regions of the world.
In Australia, upwards of $1.6 trillion is under super funds’ management, invested in local and overseas markets. Interestingly, that is the same figure climate change is said to be costing the world annually, with those costs expected to rise to over $4 trillion by 2030. For Australia, conservative estimates for annual costs of unmitigated climate change on infrastructure alone are about $9 billion by 2020 and $40 billion by 2050.
But the good news from the AODP survey for Australian super fund members is that four of the top-10 global funds with the highest survey score come from Australia, with Local Government Super, VicSuper and AustralianSuper ranking at numbers 2, 5 and 6 respectively. BT Super for Life took 9th place.
On top of this, the AODP’s Vital Few pilot in Australia, UK and Canada received responses from over 34 per cent of the asset owners contacted by members indicating that transparency issues may be significantly improved within two more years with a global expansion of member based pressure.
The bad news, for everyone, is that only five (or 1 per cent) of the (only) 460 funds which responded to the survey achieved a AAA rating or higher, while the number of funds showing little or no evidence of managing climate risk on the Index has grown.
This year, a newly added ‘X’ rating – awarded when AODP could discover absolutely nothing at all about how a fund was managing climate change risk – went to 173 funds, or 37.6 per cent of the total surveyed group.
A further 191 or 41.5 per cent of funds scored a D rating, thus boosting the number of of surveyed asset owners which disclose little or no information to 79 per cent in 2013-2014, up from 70 per cent in 2012.
“The coming year will see the industry smoked out of its fiduciary duty bunker to prove to members that it is actively addressing this calamitous systemic risk, “ John Hewson, AODP Chair said. “It is extremely telling that there are only 5 funds, or 1% rated AAA or higher out of the 460 rated and that there are so many X rated funds in the Index. ”
But while the world’s biggest investors clearly have some work to do on managing climate risk, they are at least doing better than the world’s governments, with the survey also revealing that there are more funds leading on climate policy than countries.
“What we’re seeing ever more clearly is that the polarisation between leaders and laggards within the industry is accelerating and that the investment community is moving towards change more rapidly than most of our political leaders,” Julian Poulter, Executive Director of AODP said.
