APRA warn on climate change: What does it mean for your super?

“There is no avoiding the costs of adjusting to a low-carbon future. Taking strong effective action now to promote an early economic transition is essential to minimising those costs and optimising the benefits.”

“Those unwilling to buy into the need to do so will find they pay a far greater price in the long run,” he said.

So, what does this have to do with your super and investments?

From awareness to action

APRA has previously pointed out that some climate risks are financial and that many of those risks are foreseeable, material and actionable now. A view endorsed publicly by the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC).

“When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard of hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking,” says Summerhayes.

And it seems our major super funds, banks and general insurers are also on board. Summerhayes says all are taking steps to improve their understanding of climate risk. The more forward-thinking have moved from awareness to action.

Last year, APRA conducted a survey of Australia’s 38 largest super funds, banks and insurers. It found around 65% of super funds are undertaking financial analysis of climate change scenarios as well as an assessment of potential impacts on investment risk and portfolio allocation. A similar number are voluntarily disclosing climate risks.

As the chart below shows, over 40% of super funds consider climate-related financial risk to be material. And a similar percentage believe it may be in the future.

Source: APRA

What are the risks?

One of the biggest challenge to stronger action on climate change is the question of who should carry the financial burden of addressing it, and whether the benefits are worth the costs.

“These debates exist in nearly every country… but they are especially sensitive in Australia, which counts iron ore, coal, natural gas, aluminium ores and crude petroleum among its top 10 national export earners,” says Summerhayes.

While successive governments have dragged their feet on the issue, he says the shift to the low carbon economy is already underway, driven chiefly by the weight of money from consumer demand, investor decisions and regulatory responses.

At the super fund level you can see these push and pull effects in action. On the one hand there is increased demand for sustainable investments from members and a proliferation of sustainable investment options. But change is also being driven by forward-thinking fund managers who are incorporating ESG (environmental, social and governance issues) into all their investment portfolios.

According to the Responsible Investment Association’s 2019 Australian Benchmark Report, in 2018 44% of professionally managed investments were ‘responsibly’ managed, up 13% in a year.

You can read about the latest report card for sustainable investing in the SuperGuide article: How to make your super more socially aware.

With risk comes opportunity

Climate change and its economic challenges also present opportunities for investors.

“Forward-thinking businesses have for years been seeking to get ahead of the low-carbon curve by developing new products, expanding into untapped markets or investing in green finance opportunities,” says Summerhayes.

It’s not just about electric vehicles and battery storage, exciting as these developments may be. Even some of our heaviest emitters are moving to mitigate the risks of climate change and ultimately, the risks for its investors.

Take resources behemoth BHP Billiton. In July 2019, BHP chief executive Andrew Mackenzie announced a $570 million investment program to reduce carbon emissions from its own operations as well as those from its resources.

Speaking to a business audience in London, he said that as a scientist he expects global warming will be at the upper level of forecasts and that BHP is actively working to measure and mitigate the risks.

Or AGL Energy, one of Australia’s largest and oldest energy generators. At face value, it’s at risk from climate change because it generates electricity from fossil fuels, particularly coal. But it’s also Australia’s largest ASX-listed owner, operator and developer of renewable energy from solar, wind, landfill gas and hydroelectricity.

Looking at the big picture

The risks of climate change also extend beyond the usual suspects. For example, extreme weather events may pose risks for property or infrastructure investments in certain locations as well as insurers.

As an investor you might want to know for example, which property investments incorporate sustainable materials and energy efficiency in their buildings. Not only will this create healthier environments for people to live and work in but reduce the likelihood of expensive retrofits in future.

If climate change is an important investment consideration for you, it’s important not to become too myopic. Good practice in one area can be let down in others such as poor corporate governance or product safety.

Whether you are a climate-aware investor or simply want to protect yourself from potential losses, it pays to check the sustainability credentials of your super fund and other investments.

You can do this by checking their websites and annual reports to find out where your money is invested. Also see if they have signed up for the UN-endorsed Principles for Responsible Investment.

You might also check whether they have voluntarily committed to initiatives such as the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. By doing so, they are committing to identify, assess, manage and publicly disclose their climate risks, and that means fewer nasty surprises for investors.

Summerhayes says the TCFD is supported by almost 800 companies with a combined market capitalisation of around $10 trillion.

“What these companies no doubt understand is that the very act of committing to disclose inevitably prompts them to take practical steps to enhance their preparedness for the climate-change risks on the horizon. Companies that delay or avoid adjusting to new economic realities, no matter how successful, can quickly find themselves on the verge of a Kodak moment,” says Summerhayes.