This page explores the issue of climate change adaptation and investment. As the increase in global extreme events takes its economic toll questions about the resilience of long term investments and asset management emerge.
It could be argued that the past year may be heralded as a tipping point for the investment community’s awareness of climate change impacts. The building blocks of corporate risk awareness actually arrived a little before 2012. For example the US Securities and Exchange Commission (SEC) recognising the issue and in 2010 released a guide for disclosing information related to climate change. This was followed by US advocacy group CERE’s report which deconstructed the guide and provided examples and a checklist for corporate executives, attorneys and investors. Since then a range of publications and announcements has placed climate change on the investment radar and gives executives little room for excuse in regards to considering climate change risks and opportunities.
Recent publications which explore the issue of climate change and investment include:
The Asset Owners Disclosure Project (AODP) Global Climate Index 2012 (Dec 2012): According to the AODP this is the “first ever global climate investment index showing how the world’s biggest investors, including superannuation funds, are managing climate risk.” The report shows that little consideration by asset owners is given to climate change risks. The global index was built following information requests to the world’s 1,000 largest asset owners including over 800 pension funds, 80 insurance companies, 50 sovereign wealth funds and 50 foundations/endowments.
Superannuation Trustees and Climate Change Report: Baker McKenzie (Oct 2012): The report themes the risks and opportunities into issues associated with technological impacts (mainly associated with GHG mitigation); physical impacts; and law and policy development. The report uses the extreme events (namely the Queensland Floods) to show that the physical risks from extreme weather can be far reaching (e.g. impact on global coal prices). Baker and McKenzie state that climate change is likely to affect the bottom line and return on investment of many Australia companies and they argue that it is only a matter of time before litigation emerges for failures associated with climate change.
Resource Constraints: Sharing a Finite World Implications of Limits to Growth for the Actuarial Profession: Global Sustainability Institute at Anglia Ruskin University (Jan 2013): This report focuses on the Actuarial Profession and how they incorporate climate change risks into their economic modelling. The key findings of the report are that actuaries are currently discounting the risks down to zero. The report shows that the confluence of climate change and resource scarcity poses a considerable risk to the superannuation funds in the UK in fact according to the authors “the more extreme scenarios modelled represent financial disaster; the assets of pension schemes will effectively be wiped out and pensions will be reduced to negligible levels (p.18).
NCCARF has funded two research projects (due for release in March 2013) that may also be of interest for the investment community:
Adaptation in industry and business: Climate change adaptation – a framework for best practice in financial risk assessment, governance and disclosure: Jason West et. al. (due for release 2013) This project will deliver a consolidated framework for Australian industry to integrate risk management and governance principles in relation to climate change adaptation with existing governance principles. It will identify a matrix of financial disclosure principles to act as guidance for Australian industry to use for information disclosures relating to climate change risk and adaptation costs. These outcomes will be developed in conjunction with representatives from industry, regulators and corporate governance bodies.
Climate Change Adaptation in the Boardroom: Gareth Johnston et. al. (due for release 2013) This project aims to support Australian businesses to include climate change impacts and adaptation in their decision making processes by increasing climate awareness and capacity at the executive level. It will explore climate change risks to the supply chain to help inform directors about possible impacts on their business, and will develop and disseminate a climate change adaptation guide for the boardroom.