Climate Change: Investment Risk & Opportunities

For all the warm and fuzzy talk of sustainability, there’s a yawning gap between what many big investors practise and what they preach. Not only is this a shame for the environment, it also threatens to short-change the ultimate owners of the assets. According to an Investor Group on Climate Change report published this week, some 98% of global asset owners see climate change as a material risk across their portfolios. But this apparent level of concern hasn’t matched attempts to grapple with climate-related investment risks and opportunities. Only 57% of the global players had managed to specifically refer to climate change in their investment policies.

Clancy Yeates in Sydney Morning Herald

June 18, 2011

Coalmining shares may seem lucrative today, but they could be dud investments tomorrow.

Institutional investors have been reluctant to deal with the risk that changes in climate pose to portfolios.

HOLDING coalmining shares may be lucrative today, but will there come a time when overseas climate policies turn them into dud investments?

This is just one – albeit simplistic – example of the tricky questions for investors thrown up by climate change. Unfortunately, it appears this type of debate is still being shunned by some of the world’s major investment houses.

Big wealth managers such as pension funds have been making supportive noises about action on climate change for years. After all, Australia’s resource-heavy sharemarket means the typical super fund is exposed to a rising carbon price, here and around the world.

Institutional investors also have a critical role in mobilising the $1.3 trillion in super funds under management for spending on cleaner technology.

But for all the warm and fuzzy talk of sustainability, there’s a yawning gap between what many big investors practise and what they preach. Not only is this a shame for the environment, it also threatens to short-change the ultimate owners of the assets. Thanks to super, that’s most of us.

According to an Investor Group on Climate Change report published this week, some 98 per cent of global asset owners see climate change as a material risk across their portfolios.

But this apparent level of concern hasn’t matched attempts to grapple with climate-related investment risks and opportunities. Only 57 per cent of the global players had managed to specifically refer to climate change in their investment policies. The $70 billion Future Fund also came under fire over its approach to climate risks in April after a freedom-of-information request revealed its board had not discussed climate change at any formal meetings since 2007. As the Climate Institute’s business director, Julian Poulter, said at the time: ”It seems extraordinary that potentially the greatest risk to that portfolio has had no consideration by the board of guardians.”

The revelation raises a key question: why do so many big investors seem to be overlooking the serious risks posed by climate change?

The investors like to blame squabbling politicians for failing to introduce a carbon price.

The logic is hard to dispute and the Investor Group’s report this week confirmed what economists know: price signals work.

The report found pension funds in Europe – the biggest economic region to have an emissions trading scheme – were leading the world in climate investments. But even in Europe, only 0.5 per cent of assets were invested in low-emissions projects such as renewable energy.

Australian funds directed just 0.3 per cent into climate-friendly assets. The US, where a carbon price has fallen off the political agenda, lagged behind with less than 0.1 per cent.

It seems clear a carbon price makes a difference, but big investors should also take some of the rap for their sluggish response to climate change risks.

Moves towards greater climate disclosure have been met with stubborn resistance at the big end of town.

The Asset Owners Disclosure Project has faced an uphill battle in attempting to extract climate risk data from the world’s 1000 biggest pension funds, sovereign wealth funds and insurers. When the Climate Institute tabled a resolution calling on Woodside Petroleum to reveal its carbon-price assumptions earlier this year, the move was defeated by an overwhelming majority of shareholders.

It’s hard to avoid the conclusion that many institutional investors are also guilty of dragging their feet on climate change – just like politicians.

Source: www.smh.com.au