New South Wales-based $10 billion superannuation fund Local Government Super has topped a global index that ranks asset owners based on their disclosure of climate-related risks within their portfolios.

The Asset Owners Disclosure Project (AODP) Global Climate 500 Index assesses the world’s 500 largest asset owners – representing more than $40 trillion in assets under management – for how well they disclose climate risks that could affect retirement savings and other long-term investments.

Local Government Super jumped up from second place to take the top spot in 2017.

Another Australian super fund, the $80 billion default fund for NSW public servants, First State Super, also nabbed a spot among the top five, after jumping nine spots to rank fourth. However, a number of other Australian institutions fell down the index, including the $127 billion Future Fund, which dropped 78 spots to rank 172.

Rounding out the top five funds globally were The Environment Agency Pension Fund (UK) in second place, New York State Common Retirement Fund (US) in third place, and Stichting Pensioenfonds Zorg en Welzijn (the Netherlands) in fifth place.

Australia fifth in country rankings

This was the first year that the AODP ranked countries based on the average score of their asset owners. The divergent quality of climate risk disclosure by Australian asset owners resulted in the country placing fifth. Sweden came in first, followed by Norway, New Zealand, and Finland.

AODP chair John Hewson said that in the absence of government leadership, it fell to regulators to make disclosures mandatory, as climate change posed a systemic financial risk.

“The Bank of England, the Financial Stability Board and even the Australian Prudential Regulation Authority agree on the severity of the risks; we need a complete financial industry overhaul to stop this quickly becoming an Australian train wreck. A clear first step would be to demand mandatory disclosure,” Hewson said. “With the Australian Government missing in action, the Royal Bank of Australia, APRA and the Australian Securities and Investments Commission must drive change in fund and company reporting. Failure to do so may cost us our retirement savings.”

The index assesses asset owners on three capabilities that align with key areas the international Financial Stability Board (FSB) taskforce on climate-related financial disclosures has highlighted.

These areas are governance and strategy, portfolio risk management, and metrics and targets. Institutions are graded from AAA to A ‘Leaders’ to D-rated institutions taking their first steps on climate risk. Those providing no evidence of action are rated X and classed as ‘laggards’.

Globally, there has been an improvement in the number of asset owners in each class, demonstrating that more investors are factoring in climate risk to their decision-making process.

Revised methodology

In 2017, AODP made some changes to its methodology for constructing the rankings.

“While the underlying questions remain the same as last year,” the report stated, “we have calibrated our assessment categories with the FSB’s recommendations, to help asset owners and asset managers prepare for potential future reporting requirements. This alignment provides institutional investors with reporting consistency, trend analysis and an effective framework to implement the strategies required to meet – and perhaps more importantly exceed – the FSB’s expected guidelines.”

The index also found that:

  • There was an 18 per cent fall in the number of asset owners ignoring climate risk. There are now 201 X-rated laggards.
  • The number of AAA-rated leaders increased from 12 to 17 – the largest gain in the AODP index’s five-year history.
  • There was a 36 per cent increase in the number of asset owners in the group rated from BBB to B.
  • There was a 16 per cent rise in those taking tangible action (Class C).
  • There as a 19 per cent rise in those taking first steps in acknowledging climate-related financial risk.

Top 17 asset owners (AAA-rated) for climate risk disclosure

Source: Asset Owner Disclosure Project.
Click to enlarge.