Apr 27, 2015 - 10:00am
Local Government Super fund has regained the top place in a global index rating asset owners on how they manage climate change risk, but many other Australian funds, such as the Future Fund, fared much worse than their international peers in the 2014/15 global Asset Owners Disclosure Project (AODP) index released today.
“It’s encouraging to see that Local Government Super Fund and AustralianSuper are among the nine global funds with a AAA rating in the index. But overall the index this year paints a disturbing picture of the inadequate management of climate risks to Australians’ retirement nest eggs,” said John Connor, CEO of The Climate Institute, which pioneered AODP pilots in Australia and is now the Australian agent of the global AODP.
“Too many Australian and global asset owners are risking either accelerating climate change by investing in heavily carbon-exposed assets, or being caught out by changing technologies and policies,” added Dr John Hewson, chair of the AODP.
“Currently the ratio of high carbon to low/zero carbon investments across funds is about 20 to 1, that is a 20 to 1 bet on denial or inaction, dwarfing the risks taken before the sub-prime crisis."
The index rates the world’s largest asset owners -- pension funds, insurance funds, sovereign funds, foundations and endowments -- on how they manage climate risk. Together these funds have assets worth more than US$40 trillion.
“Top rated funds protect their investments by engaging with the companies they own, divesting of heavily carbon-exposed assets, or deploying hedging strategies. Leaders are accelerating their efforts,” Connor said.
“Meanwhile, the laggards seem ignorant of climate risks as well as risks that high carbon investments will be left stranded, or made worthless, by cleaner technologies, pollution controls or changes in consumption.”
Two of the global top 10 funds this year are Australian, down from four in the previous index. Meanwhile 13 Australian funds received the lowest possible rating, including Future Fund, REST, Telstra Super and Super SA.
Global top ranked Local Government Super, which has over $7.5 billion under management, had a consistently strong performance across all five segments of the survey*. Key reasons for its high score included:
What gets measured gets managed: LGS can calculate its portfolio-wide emissions - something that only 7 per cent of the world’s top 500 assets owners were able to. LGS was also one of just seven asset owners (1.4 per cent) who reduced their intensity from the previous year.
It’s not just about fossil fuels: LGS had the widest range of climate change-related portfolio risk mitigation actions of all of the asset owners, including elements like providing guidance to its fund managers; putting a climate risk overlay on their core portfolio; underweighting carbon-intensive stocks and sectors; and using divestment and negative screens in certain sectors, among others.
“Superannuation in Australia is compulsory, and it’s a long-term investment with an average life of 20 years. This makes it crucial that funds take careful action to protect their members’ retirement incomes from climate and carbon risks, which will only worsen in future years,” said Dr Hewson.
“Asset owners need to look beyond COP 2015 in Paris – there is nothing in their fiduciary duty that removes their obligation to hedge against continuing political intransigence on climate action.”
Connor added: “Pressure to manage climate risk among the super funds is mounting, not least of all because poor management may leave trustees open to legal action. Just last week in the UK, the AODP and environmental law firm ClientEarth announced they will work with pension fund members and legal partners to drive trustees and investment managers to actively manage their climate risk. This initiative could result in a test case to clarify the legal duties of pension fund fiduciaries in the face of financially material climate risk.”
“These kinds of initiatives underscore the importance of managing climate change as a risk for our long-term investments and ensuring funds clean up their portfolios.”
Click here to read the full 2014/15 AODP index report, or scroll down for a summary factsheet on the Australian top 10 funds and background on what makes some funds leaders and others laggards.
For more information
Kristina Stefanova | Communications Director, The Climate Institute | (02) 8239 6299
* The five categories are: Transparency; Risk Management; Low-Carbon Investment; Active Ownership; Investment Chain Alignment.