Let’s be honest: One of the biggest challenges about climate change is staying on top of the debate. No one can pretend that talk of carbon sequestration or the difference between 450 or 550 parts per million greenhouse emissions is easy talk to follow.
If it is the case – as one commentator recently claimed – that the modelling in one of Garnaut’s papers takes four days to run on a very fast computer then who can really blame those who put climate change in the too-hard ‘rocket science’ basket.
But, as we all know, money talks – possibly louder than any talk of the Barrier Reef disappearing or the polar bear facing extinction. No surprise then that the focus of the climate change debate – at least for many in the financial sector – has shifted to the bottom-line.
With apologies to tree huggers, eco-warriors and even our esteemed scientists, it doesn’t matter whether a fund manager or a super fund trustee accepts the science of climate change or whether they believe that climate change is the greatest hoax the world has ever seen. The moment the talk turned to a cost on carbon, climate change became a tangible investment risk. When the Emissions Trading Scheme (ETS) is up and running in 2010, carbon will appear in company financials. It will be one of a myriad of risks that investors face. The carbon-intensity of a portfolio investment will be of material interest.
With all this in mind AIST recently commissioned UK environmental researchers Trucost to examine the carbon footprint of 14 of our largest superannuation funds. Trucost examined the greenhouse gas emissions associated with 100 sharemarket portfolios, giving them a rating from biggest footprint to smallest. While the research revealed a wide variation in the footprint size of each fund, the news wasn’t all bad for super funds.
Encouragingly, the research suggests that most funds can reduce their carbon-risk exposure but still retain some exposure to the relatively high performing carbon-intensive sectors. Those funds that shift investments strategies towards companies with lower carbon emissions will be best placed when an ETS gets underway. As one keynote speaker noted at last month’s Australian Super Investment Conference in Port Douglas, the person who works out a way to make carbon sequestration economically viable will be the next Bill Gates ( if you have any talent in this direction get busy, or if you’re a superfund invest in some!).
But talk about such brilliant breakthroughs was tempered with warnings of a clean-tech investment bubble and the need for fund managers and trustees not to lose sight on what makes a good investment. Indeed, many in the investment industry are predicting that some of the best-value opportunities in a post ETS world are likely to be mainstream – such as large-scale infrastructure investment, the building of new power stations or the design of energy-efficient buildings.
As major asset owners, super funds are perfectly placed not only to pressure companies to reduce their emissions but to encourage both the corporate sector and governments to investigate, develop and invest in these new forms of wealth creation. This is a form of wealth worth having.
Yes, climate change is a complex issue and it’s a debate that not everyone will understand, or want to hear. But it’s only a matter of time before terms like carbon footprint and carbon optimisation become part of everyday language and shareholders start latching onto the concept of carbon risks. Climate change will not disappear like some of the many transient issues that our industry sees.
There are few certainties surrounding our investment landscape but one certainty is that the management of climate change risk and the opportunities that will follow will grow rapidly over the coming years. No-one can have failed to notice that climate change has emerged as one of the cornerstone issues relating to real material returns from all asset classes. It’s a natural progression that the structures, processes and skills for managing climate change are elevated further up the chain to us, the asset qwners, who are ultimately responsible for the impacts on returns.
To that end, AIST has partnered with the Climate Institute to launch a world first Asset Owner’s Climate Change Disclosure Initiative. Super funds will soon have no choice but to start walking the talk.