Superannuation for most of us is compulsory saving that we really don't worry too much about until we start getting closer to retirement. We leave it to the investment managers and superannuation trustees to judge the benefits and risks in investment strategies they put forward.
But what if their assessments of risk and investment strategies are all short term market oriented or only consider past trends. This is the problem posed by climate risk and the carbon bubble. The carbon bubble represents a major shift in resource exploitation and energy production, and a social and technological transition required. Australia's headlong rush for coal expansion risks stranded assets. The economic risks of a carbon bubble and stranded assets have been warned by Carbon Tracker, PriceWaterhouseCoopers (PwC) and International Energy Agency (IEA).
Global pension funds control about $30 trillion in assets. It is estimated that over 55 per cent of pension contributions are invested in high-risk, high-carbon assets with less than 2 per cent being invested in low-carbon assets.
With climate change science indicating that 80 per cent of known fossil fuel reserves need to be left in the ground to maintain a safe climate, there is an enormous carbon bubble of overvalued assets. This poses a huge problem: when this carbon bubble bursts it will substantially downgrade the value of these superannuation investments, that is, your and my future retirement income.
Watch former Liberal Party leader and Economics Professor John Hewson at the Festival of Dangerous Ideas in Sydney on the subject of Your Superannuation Is Destroying The Planet.
A report by the Australia Institute published in March 2014 found that investments in coal, oil, and gas increase financial risk without necessarily increasing returns. Modelling done comparing investments filtering out fossil fuel investments in comparison to exposure to the ASX200 index showed similar levels of return. The Climate Proofing Your Investments: Moving Funds out of Fossil Fuels report (PDF) stated:
If the world acts towards its stated goal, most carbon reserves will be ‘stranded’, meaning they will lose economic value ahead of their useful life. Even if they are insufficient to reach the stated goal, policy action, market competition and political stigma still threaten stranded assets. Companies conducting projects with the highest extraction costs (for example, tar sands or Arctic oil) and the most intensive emissions profiles (for example, coal) are likely to be the first to have to write down the book value of their assets because of stranding.
We are already seeing changes in carbon investment with high profile divestment from coal by Stanford University in the US, investment ban on coal from Sydney University, and the divestment from fossil fuel mining by Uniting Church of Australia.
I attended a member seminar of my own industry superannuation fund recently - Telstra Super. The powerpoint presentation contained one slide on managing risk, but surprisingly climate risk was not mentioned at all. I queried this and the short answer to my question on what they were doing on climate risk was: 'We are aware of the issue, but we don't have a methodology to assess and manage this risk, so we are effectively doing nothing.' Sounded pretty much like head in the sand talk to me.
John Hewson is a Professor of Economics and was aligned with the conservative side of politics being parliamentary leader of the Liberal Party going into the 1993 Australian Federal election. His major policy platform was called Fightback with a major plank being economic and taxation reform and calling for introduction of a GST. The Labor Party were able to run an effective anti-tax campaign which resulted in the re-election of the Labor Government under Prime Minister Paul Keating. Indeed, I remember going to one of Hewson's lunchtime public rallies in 1993 in Melbourne city and heckling him on the GST policy.
Hewson also took to that election as part of his environment policy a reduction of Australia's greenhouse gases by 20 per cent on 1990 levels by 2000, which would have been a great time to start climate action and our energy transition. We ended up getting the GST with the Howard government, but we are still struggling to limit our greenhouse gas emissions. Our current target of 5 per cent on 2000 levels by 2020 still might not be met due to the Abbott Government proceeding in their first year with the abolition of carbon pricing, energy efficiency programs and creating a hostile and uncertain environment for renewables with the Warburton review of the RET.
As an academic, Hewson speaks with authority and respect for climate science and the researchers in this field, and has thrown himself into working for a solutions through changing business investment through superannuation.
He was not very impressed with the climate problem being treated for short term political purposes, attacking recent statements by the former Prime Minister John Howard:
"I was pretty dismayed towards the end of last year when I saw a speech made by our previous Prime Minister John Howard. He made the speech in London to Nigel Lawson's climate denial group. He argued that to him he was an agnostic when it came to climate change and he preferred to rely on his instincts. I would say to you it is not a question of religion, its a question of science. Its not a question of instincts, its a question of scientific fact. I was also disturbed to see how in that speech that he had openly played politics with the issue...elements of the issue like policy response with an Emissions Trading Scheme depending on the short term political circumstances in which he found himself. For climate change to me is a long term structural challenge...."
The past few years Hewson has been establishing the Asset Owners Disclosure Project with the aid and support of the Climate Institute. This project rates and ranks on a global level superannuation, pension and other various beneficiary investment funds based upon their exposure to fossil fuel and high carbon intensive investments. Most of these funds are real laggards investing largely for the short term, following the major market indexes and taking no account of climate risk. A small number of funds have adopted methodologies for incorporating climate risk and a very few for almost entirely choosing low carbon risk investments. Rating these funds is a top down approach.
The Vital Few - Working from the bottom up
Superannuation and pension funds trustees have a fiduciary duty to balance risk and return. There are also obligations of accountability to members or beneficiaries in these funds. So the Asset Owners Disclosure Project has established a website and social media platform - The Vital Few with template letters to send to pension and superannuation funds.
Fund members are encouraged to ask their trustees or fund administrators what climate risk strategy, if any, is being used, what are the levels of high carbon and low carbon investment of the fund, and to push for increased investment transparency and disclosure. Any replies are encouraged to be forwarded back to The Vital Few so that the fund ranking and rating can be reassessed.
Switching to Ethical pension funds
Getup have also joined this area of campaigning on superannuation transparency and disclosure launching a website called superswitch.org.au
This comes as Australia's first totally fossil fuel free retail superannation fund was launched on September 4 - Future Super. Initially offering a balanced growth investment fund with social and ethical positive and negative filtering of potential investments. The company has been established by former Getup CEO Simon Shiekh with the support of the Bendigo Bank and Investment firm Grosvenor Pirie and various climate campaigners and activists.
We're so excited to launch today! Welcome to Australia's first fossil fuel free super fund. Learn more here - https://t.co/A9wV7t2Hpi— Future Super (@myfuturesuper) September 3, 2014
It provides an alternative to the deep green and well established ethical filtered investment options of the retail Australian Ethical Super, who recently declared surging membership (up 19 per cent this year) with a record $887 million in group funds now under management.
So, time to get busy querying your pension or super trust in how they invest your retirement money. Ask them questions about how they are currently managing carbon and climate risk including questions on their current investments strategies:
- What proportion of your portfolio is invested in high-carbon investments?
- What proportion of your portfolio is invested in low-carbon investments?
- How do they plan to manage the risk of rapidly devaluing fossil fuel investments in light of the 'carbon bubble' research?