The importance of climate change as an issue for pension funds and their trustees was highlighted again in May, when the Carbon Disclosure Project (CDP) published the findings of its second survey on the carbon emissions of FTSE500 Global Index Companies. CDP is a coordinating secretariat for institutional investor collaboration regarding climate change.
In its report CDP notes that weather-related natural disasters caused about $70bn (e58.2bn) of damage last year, of which only $18bn was insured, and that “for the first time, climate change was explicitly identified as being a factor”. It continues: “The effects of this will be felt in key sectors and commodity markets.”
It also stresses that “mainstream pension trustees, analysts, bankers, insurers and fund managers have begun to appreciate the implications of climate change and greenhouse gas policies in financial terms. No longer can fiduciaries claim to be unaware of what is at stake”.
The interest taken by pension funds and their trustees in this matter is evident in the involvement of the industry through the Institutional Investors’ Group on Climate Change (IIGCC - www.iigcc.org). David Russell, a member of the steering committee at the IIGCC and adviser on responsible investment to the UK’s Universities’ Superannuation Scheme, an IIGCC member, notes that pension funds account for half of the IIGCC’s 23 members, all but three being UK-based.
“The IIGCC had a significant input in discussions with the CDP team to make the questions as appropriate as possible to provide information for fund managers,” he says. CDP coordinator Paul Dickinson adds that “some of the first investors to sign up to the project were IIGCC members”.
Russell believes that climate change has two main implications for pension funds and their trustees. In respect of the short-term he points to the emissions trading system that will come into effect in the EU from next year and to the deliberations on the introduction of similar systems taking place in Japan, Canada and some US states.
“This impacts on the companies that we own,” he says. “Therefore we should be making sure that these companies are addressing this issue. Otherwise we stand to lose shareholder value. That affects our pensions.”
He adds: “Obviously as pension funds we also want to make sure that analysts are taking account of this exposure in their assessments of companies and that the fund managers are taking it into account in their investment decisions.”
On the subject of public policy, Russell sounds a note of caution. While broad policy objectives are all very well, he points out that “what business and investors need is clarity in terms of where policy is going and how the goals of reducing emissions, increasing the use of renewable forms of energy and increasing energy efficiency are going to be achieved. Industry can plan ahead and invest to achieve these aims in the most cost effective way if it is given details of how it is expected to get there.”
He adds: “What industry and investors don’t like is discontinuous change where nothing happens then you’ve got two years to achieve the target. That is a concern.”
Looking to the longer term, Russell stresses that if climate change isn’t addressed there will be implications for the investments held by pension funds in companies that would be affected by changing climate and the ever more stringent regulations.
The long-term view of pension funds means that climate change is of more immediate concern to them than to other institutional investors, as Dickinson explains: “Now more than ever pension funds have a unique role in applying their particular perspective and authority to the development of their investments.”
To help them apply this authority data, the CDP survey can be used by fund managers to form opinions on how individual respondents are managing the issue of climate change.
Awareness of climate change among pension funds is growing and, as we can see in the activities of the IIGCC, some pension funds are taking a lead. Unsurprisingly though, as Russell says, “there is some way to go more work needs to be done in informing pension funds as to what the potential implications are”.
To remedy this Dickinson suggests that trustees “ask their actuarial advisers to give opinions about the impact of climate change over the next 50 years and what implications that might have for the optimum discharge of their duties”.
But pension actuaries seem to have some ground to make up. “An actuary in the general insurance department of a major insurer, especially one whose client has exposure to weather damage, will have a lot of very strong opinions and will be very well informed indeed,” he says. “On the other hand, a pensions investment adviser has probably never thought about climate change and you couldn’t blame them. But in one day of desk research you could get a lot of data, most of it government backed.”
The inaugural CDP last year had the support of 35 institutions, 29 of them European, with assets of $4trn.