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Investors warned of climate risks to high-carbon assets
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Investors warned of climate risks to high-carbon assets

Intro

Asset owners have had fair warning that the investment landscape around the world is seriously threatened by climate change, yet the vast majority are doing little to shield themselves from its risks. This warning comes from the Asset Owners Disclosure Project’s (AODP) latest Global Climate Investment Index, and it should send a shudder down the spine of anyone who has retirement savings. Climate science is now more clear than ever, the divestment movement is continuing to heat up and renewable energy is booming. Despite these facts, the AODP analysis identifies just how poorly many of the world’s largest investors, particularly pension fund managers, are managing climate risk. Climate risk is recognised as the most likely driver of the next great financial crisis. Asset owners have a fiduciary responsibility to acknowledge long term threats, yet most remain unprepared for the climate risk crisis due to their short-term focus.

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RT @GreenSchenk How are those investment heavyweights managing the #climate risks of your savings? Not so well aodproject.netActions

Key Points

  • The latest AODP index found that asset owners are failing to manage the systemic risk posed by climate change when science tells us risks to those assets are increasing at an unprecedented rate. To protect the value of their assets, these institutions need to take basic risk management steps to reduce their vulnerability to the climate crisis. Unfortunately, the AODP found that 80% of asset owners are doing either very little or nothing at all to minimize their climate risk. With each passing year, their inaction only increases the likelihood that their assets will deteriorate as the world moves away from fossil fuels.
  • Asset owners are gambling with the pensions of workers by failing to manage climate risks and by not disclosing these risks to their members. Most of these assets are the hard-earned pension funds and savings of workers around the world. Asset owners are charged with the responsibility to invest these savings on workers’ behalf, managing them for long-term security. Making high carbon investments with these assets is a huge gamble for workers and the market — and it’s a risk that can be avoided.
  • Avoiding climate risk is common sense, and it’s helping asset owners remain successful and ensure the long-term security of their funds. The AODP’s most highly-rated asset owners are large, successful institutions. Incorporating the reality of dangerous climate change and the need to act isn’t far-fetched, it’s the way sound businesses and financial institutions are going to ensure their continued success. In fact, if all of the asset owners were mitigating their climate risks to earn a AAA rating by the AODP Index, climate change could be solved without a single politician.

Background

The Asset Owners Disclosure Project’s 2013/14 (AODP) Global Climate Investment Index clearly identifies how most of the world’s biggest investors are managing, or failing to manage, climate risk. The AODP 2013-14 Global Index includes data from Pension & Superannuation funds, insurance companies, sovereign wealth funds and foundations/endowments. It assesses them on transparency, risk management, investment chain alignment, active ownership and low carbon investment. The analysis found that Asset Owners are ignoring their fiduciary duty by allowing climate risk to be priced according to business as usual.

Specifically, only 5 funds were rated AAA or higher out of 460 rated (1%) and 1000 invited to disclose and 29 rated A or above (6%) who we feel will survive a carbon crash in any kind of good shape. A massive 80% of asset owners are either D rated (abysmal) or X rated (doing zero, nil, nothing). When compared to last year’s initial Global Climate Investment Index an increasing polarisation between leaders and laggards across the globe can be seen.

According to calculations by Carbon Tracker, fossil fuel reserves, understood to be deposits confirmed to exist but are yet to be extracted, contain around 2860 GtCO2, which is enough to more than double almost every budget estimate for the amount of carbon that can be burned before the world can no longer contain warming to 2 degrees. Contemporary accounting practices assume those reserves will be burned and simultaneously bolster the profits of fossil fuel companies and their shareholders. However, if these fuels must be “unburnable” in order to keep the planets temperature within safe limits, then they are inflating the perceived value of these companies, which are also spending about $674 billion each year to find more reserves. If the two degree target is actually taken seriously, these companies are wasting enormous amounts of shareholder capital. However, it is more likely, that the continued investment in burning known fuels and searching more more is an indication that fossil fuel companies don’t believe the world leaders are serious about meeting a two degree target and that they are unfazed by exceeding such a target.

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Key quotes

  • “The sheer scale and potential reach of climate risk is such that any fund cannot claim to be looking after the long term interests of its beneficiaries if it’s not managing the components of this climate risk. What we’re seeing ever more clearly is that the polarisation between leaders and laggards within the industry is accelerating.” - Executive Director of AODP Julian Poulter
  • “While we can see some leaders emerging, many haven’t acknowledged their dangerous and foolhardy addiction to investments riddled with climate risk, let alone checked themselves into rehab. It’s pretty clear through the Index that the big laggard funds continue to be too scared to take on big fossil fuel companies, even though they know there are enormous risks through continuing investing in them. Investment funds must put their members’ interest front and centre but when it comes to climate risk they largely fail at the first hurdle.” – Executive Director of AODP Julian Poulter
  • “It is positive to see some leaders actively hedging their risk but the lack of understanding by many asset owners of how to best mitigate climate risk is alarming. Their 20-1 gamble on a near business as usual scenario is mis-priced and they need to actively hedge immediately.” – Bob Litterman, AODP Board Member and former head of risk at Goldman Sachs in the United States
  • “The coming year will see the industry smoked out of its fiduciary duty bunker to prove to members that it is actively addressing this calamitous systemic risk. It is extremely telling that there are only 5 funds, or 1% rated AAA or higher out of the 460 rated in the Index.” – AODP Chairman John Hewson
  •  “It’s becoming ever more apparent that some within the investment community are not acting in the best interest of those whose money they represent. It must be remembered that much of the money being held by these organisations is the product of workers’ lifelong savings.” – AODP board member and General Secretary of the International Trade Union Confederation, Sharan Burrow
  • “To see big bad financiers at it again so soon after the sub-prime disaster – paying short term commissions to rich middle men at the long term expense of workers capital – is both shocking and shameful.” - AODP board member and General Secretary of the International Trade Union Confederation, Sharan Burrow

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This article originally appeared in The Tree.

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