Mercer Investment Consulting has taken the unusual step of warning super fund trustees of the financial and other risks associated with global warming and suggested funds managers needed “a gentle nudge” to think through the link between climate change and financial risk.

Tim Gardener, the global head of Mercer IC, published a report last month and is driving a campaign for the funds management industry to take greater recognition of global warming and other environmental issues. In Australia last year, Mercer questioned funds managers for the first time on whether they had policies to account for these factors. In contrast to many of the proponents of ethical investing, Mercer is not arguing moral grounds for consideration of environmental issues. This is similar to the arguments adopted by BT Financial Group’s Governance Advisory Service, which advises several big super funds on these issues. Specifically with respect to climate change, Gardener says there are five risks to be considered: . regulatory risk – a result of legislation, such as the European Union Emissions Trading Scheme, which has the most impact on sectors with high emissions, such as oil and gas; . physical risk – caused by floods, storms and rising sea levels and affecting sectors that are dependent on the physical environment, such as insurance, agriculture and tourism; . litigation risk – organisations responsible for greenhouse gas emissions could be liable for damages associated with the physical effects of climate change; . competitiveness risk – companies that take action on climate change may secure a competitive advantage; . reputational risk – companies that do not have policies in place to address climate change could face a backlash from consumers, investors and other stakeholders. Gardener says trustees can make themselves aware of the issues facing their funds so they are in a better position to develop an appropriate investment position and policies. For larger, internally managed funds a further step could involve determining whether the investment approach takes account of these risks and opportunities. Funds could go further still and screen portfolio holdings or use active ownership strategies, such as investing in clean technologies. Trustees of funds with external managers could explore the extent to which climate change risks are understood by their investment managers, he says. “It is clear that climate change introduces unrewarded investment risk and is an opportunity to enhance long-term return,” he says. “But managers with a short-term focus often ignore this. The risks are becoming too significant to ignore and many fund managers need to be given a gentle nudge in the right direction.”

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