Via Financial Times

Apocalyptic wildfires in Australia have supercharged a national debate over how it should respond to a crisis that has cost dozens of lives, killed hundreds of millions of animals and scorched more than 10m hectares of land. 

Pressure is building on local pension funds and asset managers to step up their efforts to shift to a low-carbon economy. Public concern has been mounting over the devastating environmental impact of the fires, but also the dust storms, torrential rain and floods that followed them.

Two-thirds of the respondents who participated in an Australian Institute study blamed climate change as the cause that made the wild fires worse. The Canberra-based think-tank surveyed 1,033 Australians.

“Fossil fuel companies should be contributing to meet the costs of disasters fuelled by climate change but currently it is the Australian community that pays,” says Ebony Bennett, deputy director of the Australia Institute.

She suggests that a carbon pollution levy should be applied to coal, gas and oil producers. Ms Bennett estimates that the levy would raise about A$1.5bn annually. 

But Australia’s coalition government led by prime minister Scott Morrison has rejected calls for reforms to its climate change policies.

“I’m not going to put a carbon tax on people. I’m not going to increase their electricity prices and their costs of living. And I’m not going to wipe out [Australia’s] resource industries,” Mr Morrison said last week.

With close to A$3tn in assets, Australia’s superannuation industry has considerable power to influence changes in company behaviour.

However, most of the industry’s leaders have remained firmly in the shadows. They are reluctant to oppose the government’s support for the mining and energy sectors and their powerful lobbying groups, such as the Minerals Council of Australia.

Australian Super, which oversees assets of A$172bn on behalf of 2.2m members, backed half the climate resolutions in the country during the period. The pension fund, which is part of the Climate Action 100+ influential group of investors, said it was unavailable for comment.

Unlike in Australia, many of the biggest European investors have been increasingly willing to use their vote. BNP Paribas AM, Legal and General IM, DWS and Natixis IM backed at least 70 per cent of climate resolutions, according to Majority Action, a non-profit.

Large Australian investors are unwilling to take a tough stance, even if they believe global warming could hurt returns in the long term, says Tim Buckley of the Institute for Energy Economics and Financial Analysis, a research group.

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A climate change specialist says: “It’s a small country and people are worried about burning their bridges, plus the political and media environment is quite different to even the US.

“So many of the investors who really care about climate change still put a significant premium on not rocking the boat and avoiding ‘politics’.” 

Australia is the world’s largest exporter of coal. It accounts for close to 4 per cent of worldwide carbon dioxide emissions after including the contribution from its vast international sales of fossil fuels.

Australia’s stock exchange is home to 633 metals and mining companies, with Glencore, BHP and Yancoal ranking as the country’s top three coal producers. These industries deliver crucial dividend streams to Australian investors, including large superannuation funds which pay the nation’s pensions. 

But questions are being asked about the effectiveness of Australian asset managers and pension funds as corporate stewards that ensure companies are preparing for the transition to a low-carbon economy. 

Many of the country’s biggest investors, including Macquarie’s asset management arm along with the pension funds UniSuper, Equipsuper and Rest Super, failed to support any climate change resolutions at Australian-listed companies during the 2018-19 annual meeting season.

Only five companies, including Rio Tinto and Whitehaven Coal, faced such resolutions during the 2018-19 season, according to Proxy Insight, the data provider.

Australian corporate law requires changes to company bylaws to be agreed by shareholders before resolutions can be voted, a cumbersome process that makes any change more difficult.

“The voting records [of large Australian investors] suggest that they support the unconstrained expansion of fossil fuels reserves in Australia,” says Dan Gocher of the Australasian Centre for Corporate Responsibility, a non-profit association.

He highlights three pension funds — Local Government Super (LGS), Vision Super and Cbus Super — as “notable exceptions” for their climate change policies. 

Craig Turnbull, chief investment officer at LGS, says the A$12bn pension fund has identified climate change as an important portfolio risk for more than a decade.

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“We reduce this risk by screening out some industries from investment, avoiding [external fund] managers with a poor understanding of climate change risks as well as pressuring companies and the government to reduce emissions,” says Mr Turnbull.

Cbus Super, the A$54bn pension fund for the construction and building industries, is undertaking a review of its climate change commitments. In March, it will roll out a carbon transition risk tool to lower its portfolio’s carbon intensity. It has committed to reaching net zero emissions for its property and infrastructure portfolios by 2030. 

David Atkin, chief executive of Cbus Super, says that a re-evaluation of climate risks across the financial sector is inevitable. 

“Sustainable finance has been operating at two speeds in Australia, with a number of investors and banks taking a sophisticated approach to climate risk and investment. Others have been trailing behind,” he says.

Stuart Palmer, head of ethics research at Australian Ethical, a superannuation fund that supported all climate resolutions in the 2018-19 season, says investors need to use “all the tools at their disposal to promote climate action”: in their investments, in private engagements with companies, in shareholder meetings and beyond.

Australia’s financial regulators have issued clear directions to address the risks of climate change. 

The Australian Prudential Regulation Authority said in March 2019 it expected to see “continuous improvement” in the management of climate change risks along with concrete measures to transition to a low-carbon economy.

The regulator said it expected more superannuation funds to comply with the Task Force on Climate-related Financial Disclosures (TCFD), the voluntary reporting standards spearheaded by Mark Carney, the outgoing Bank of England governor. 

But just eight superannuation funds have integrated the TCFD into their disclosures or have specific plans to do so, according to the Responsible Investment Association Australasia. 

Direct engagements with companies on environmental, social and governance issues were undertaken last year by 25 superannuation funds. Yet only 16 of the funds publish an engagement report. 

Emma Herd, chief executive of the Investor Group on Climate Change, an association representing Australian and New Zealand institutions, says that pressure from regulators and the wider public has increased investor engagement on climate risks. 

“As a result, we have seen large numbers of Australian investors collaborate through initiatives such as Climate Action 100+.”

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There is a growing awareness among Australian pension funds and other institutional investors that climate change represents an investment risk, says Helga Birgden of Mercer.

“Many of the large institutional investors are engaged. But there is still a lot of work to be done. Time is of the essence and there is still a long way to go,” says Ms Birgden. 

As a result of the wildfires, Mercer has seen a spike in downloads of its latest analysis of the implications for investment in a time of climate change.

The consultancy has forecast that returns from coal investments will be 7.1 percentage points a year lower until 2030 with an absolute loss of value expected as early as 2041 if global warming is limited to 2C, a threshold that scientists warn will wreak widespread environmental damage.

The outlook for oil and gas investments is also bleak, with returns forecast to be 4.5 percentage points a year lower until 2030 with a cumulative 95 per cent loss of value expected by 2050, according to Mercer’s analysis.

“It is also important for investors to realise that they can also earn a premium by tilting their portfolios to low carbon strategies and adding to their exposures in sectors such as renewable energy, sustainable infrastructure and green real estate,” says Ms Birgden. 

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Frank Jotzo, director of the Centre for Climate and Energy Policy at the ANU Crawford School of Public Policy, says that the fires are a national crisis that provides ample justification for Australia’s government to introduce more effective climate change policies.

Australia should embark on a “nation building” programme that would include reconstruction work, investing in infrastructure as well as assistance for the hard-hit agriculture and tourism sectors, he says.

Opposition to reform seems to Mr Jotzo inevitable from media owned by Rupert Murdoch, some “rabid” backbenchers in parliament and the coal industry.

But there are glimmers of hope despite the dearth of investors willing to take on a government that has been panned internationally.

“The bulk of Australia’s business community yearns for a sensible national climate policy,” Mr Jotzo says.