As Australia continues to suffer from the massive bushfire disaster, the country’s largest investors are facing increasing pressure challenge to tackle climate issues in their portfolios.
Some asset owners are seeking to reduce exposure to climate risks and allocate capital to strategies designed to perform well in a low-carbon economy, typically by considering environmental, social and governance (ESG) factors of their investments. But climate change experts say more concerted action is needed.
The Responsible Investment Association Australasia (RIAA) released its Super Study last month (December 2019) which showed that climate risk was a standing item on only 10 super fund board agendas (18% of the research universe).
Helga Birgden, global business leader on responsible investment at Mercer in Melbourne and deputy chair of the Investors Group on Climate Change (IGCC), told AsianInvestor the bushfires are a clear indicator of the urgency with which the investment community needs to act.
Super funds may be limited on what they can do in the short term, however. One senior superannuation industry executive, speaking anonymously to AsianInvestor, said, “I do think the fires are a game changer. The new political environment around climate change will give the industry confidence to be stronger in its recommendations”.
But he added that super fund managers will not find it simple to rapidly shift their portfolios towards more climate-friendly investments.
"In terms of actually meeting climate objectives, it is not that clear that ESG integration can shift portfolios with the urgency required".
“The area to watch is how responsible investment evolves. Currently the idea of ESG integration dominates this landscape but in terms of actually meeting climate objectives, it is not that clear that ESG integration can shift portfolios with the urgency required."
To date, 25 Australian super funds have become signatories to the United Nations Principles of Responsible Investing, which is broadly seen as commiting to ESG considerations.
That said, several of the country's asset owners appear to devote at least some consideration to ESG. The RIAA survey covered investors with assets of $1.75 trillion and estimated that 70% of these funds (or $1.23 trillion) were assigned to ESG strategies.
Examples of Australian funds taking climate change seriously when investing include Future Super's commitment to 100% divest from fossil fuels and other 'harmful' industries. In addition, its renewables fund option has the target investment allocation of 20% into impact investments that contribute to the transition to a renewable economy.
Cbus sets targets at the asset allocation level with net zero emissions by 2030 for property and infrastructure, as well as making a 1% investment allocation to climate solutions;
Hesta’s international equities low-carbon fund has a carbon footprint at least 50% below the carbon footprint of the relevant benchmark.
But even a fund like VFMC, which last year was named as one of Asia's responsible investing leaders, still struggles with some crucial aspects of its climate policy.
Chief investment officer (CIO) Russell Clarke told AsianInvestor that VFMC had made initial assessments of its carbon footprint, but it was unhappy with the quality of the data.
Louise Lew, head of sustainability for Willis Towers Watson in Australia, told AsianInvestor there are further practical actions that all asset owners can take.
As well as integrating climate assessments within their investment decision-making, Lew said, “an important action that institutional investors can take is to use their influence to engage with policy makers and companies, either directly or collaboratively with other investors.
"There is a number of collaborative groups, such as Climate Action 100+ (a group of investors managing assets worth more than $35 trillion), carrying out engagement activities to progress action and encourage greater transparency.”
Climate Action 100+ pressures fossil fuel producers and other companies to show how they will reduce carbon dioxide pollution. Notably, just last week (January 8) asset management giant BlackRock announced it is joining the group.
POLITICAL WILL NEEDED
According to Birgden and many others, the bushfires also highlight the need for much more sophisticated political leadership in Australia on climate change.
Australia’s prime minister Scott Morrison faced heavy criticism for holidaying in Hawaii over the Christmas period, as the bushfires burned. His government’s policies are considered to be climate unfriendly and he is seen as a climate change sceptic, even as public support grows for more action to combat the effects of hot dry weather conditions.
Morrison's response has been tepid so far, with the premier making largely token statements about the need to consider the issue more closely. Australians are now taking to the streets demanding his resignation.
Greg Comfret, chairman at the super investor-owned fund manager IFM Investors, with A$152 billion of assets allocated across listed equities, debt, private equity and infrastructure, was previously minister for climate change and energy efficiency in the Australian government. He said that “there’s a manifest range of issues associated with climate change that investors really need to think very carefully about”.
For example, one way IFM is tackling climate change within its A$60 billion infrastructure portfolio is to look at the emissions profile of the assets themselves. Over the last two years, the fund house has been measuring and reporting on greenhouse gas emissions. “We are now working with the management of those businesses to develop a plan to reduce those emissions and their intensity (the amount of emissions per unit of economic output),” said Comfret.
This approach would work for other funds too. According to Joey Alcock, head of the responsible investment group at Melbourne-based asset consultant Frontier Advisors, the unprecedented scale of the latest bushfires will trigger greater efforts by investors to assess the resilience of particular assets.
“In turn, this may recalibrate the prices investors are willing to pay for assets with heightened exposure to these risks, as well as the companies reliant on such assets.”
Alcock believes that while climate-aligned investments have historically focused on climate change mitigation (e.g. renewable energy), recent events may drive investor interest in technologies and solutions which enable society to adapt to an already changed climate.
“These may include private capital investment in new construction materials/techniques to make buildings more resilient or agricultural technologies to deal with water scarcity," he said.
Ultimately, VFMC’s Clarke believes the biggest impact asset owners can have is to pressurise their external fund managers to do more to invest in a more climate friendly manner, or lean on their investee companies to change their behaviour.
“We can influence a lot of other investors that way and have a much more meaningful impact from a carbon footprint perspective,” he said, adding: "The biggest impact might be having more investment managers who do a really good job on climate in different asset classes.”