Super Funds Turn Up Heat (11 Apr 2011)

Long term and patient investors like superannuation funds are ideally situated to play a major part in addressing climate change. The story goes that this is because their investment horizons must encompass the immediate and longer term needs of their different members.

It is in this context that superannuation funds are being encouraged to shift as much as 40 per cent of their portfolios to assets that are ‘climate sensitive’. A recent report for global superannuation funds – including several Australian funds – makes this and other suggestions.

Working from the premise that climate change cannot be good for investors, the report conducted for the Carbon Trust, the International Finance Corporation and global superannuation and retirement savings funds by Mercer analyses several scenarios.

The focus is on so called ‘Strategic Asset Allocations’ (SAA) or investments across asset classes to balance returns with risks. This is a natural emphasis for funds that need to provide retirement savings to members who at any one time, span at least three generations.

Being somewhat backward looking, SAAs are not surprisingly found to fall short of proper assessments of climate change risk.

Using a framework that allows for analysis of technology investments, the impacts of climate change and how it will affect investments and the implied impact and costs of global policy developments. Overall, the report suggests policy alone could contribute an additional 10 per cent to total portfolio risks.

Inevitably, the report suggests further diversification for institutional investors. It is this that leads to the suggestion that a 40 per cent allocation to climate sensitive assets is an option.

While the report is new, action is already under way. There has been a concerted effort from the nation’s major superannuation funds to discuss climate change strategies and preparedness with the largest companies. Some of the largest industry funds are reportedly conducting portfolio assessments to determine their exposure to climate change and the preparedness of fund managers to address climate change.

Some funds suggest they make asset selections with a ‘climate filter’ or with a nominal carbon price in mind.

The implications of this institutional investor activity for those seeking investment of debt funding is that whether there is a carbon price or not, investors will increasingly shun those investments that provide a portfolio risk arising from their climate exposure. That does not mean automatic, immediate or total disinvestment, but it will make their business life more difficult over time.

Mercer worked with some of the team that contributed to the Stern Review to produce the report – Climate Change Scenarios – Implications for Strategic Asset Allocation. Click here for further information.

 

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