Global banks and pension funds are leading us headlong into a financial crisis that could dwarf the GFC, thanks to their over-exposure to fossil fuels and the associated risks of climate change.

That, at least, is the view of former Liberal leader John Hewson.

Speaking as chair of the Asset Owners Disclosure Project in October, Dr Hewson put the issue in no uncertain terms. The world’s top 1000 pension funds, he said, invest 55 per cent of their money – that’s $US41 trillion – in fossil fuel-exposed industries, and just two per cent in low-carbon industries.

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“That is a 55:2 punt against climate change itself, or government action to tackle climate change,” he said.

“It’s a significant risk and it dwarfs the risk that was taken in the context of the sub-prime [crisis of 2007-8]. The risk of a climate-induced global financial crisis is very real, and is getting more real every day if those sorts of activities continue.”

Some in the industry, however, are taking the risk seriously.

It’s time for institutional investors to take their heads out of the sand. Photo: Shutterstock

A report released in June by investment consultant Mercer provides a detailed framework for institutional investors to prepare for the inevitable effects of climate change. The report urged funds to become ‘future makers’ by pre-empting the regulatory and environmental effects of climate change.

While most investors bury their heads in the sand, many Australian super funds are becoming ‘future makers’. As a nation, Australia is number two in the world (as judged by the Asset Owners Disclosure Project), second only to Norway.

Super funds lead the way

Of the 1000 largest pension funds in the world, Australian superannuation fund Local Government Super (LGS) is number one when it comes to preparing for the risks of climate change, as judged by the Asset Owners Disclosure Project.

Number two in Australia, and number seven in the world, is the nation’s biggest super fund AustralianSuper.

These Aussie funds are two of only nine funds to have a AAA rating.

Industry funds First State Super and VicSuper, meanwhile, have AA ratings, while CareSuper has an A rating.

Not-for-profit industry funds HESTA, Cbus, Equip and UniSuper are all in the top 50.

Westpac-owned BT Financial Group also scores comparatively well, with a BBB rating. In general, if you’re concerned about the environment and exposure to carbon risk, Westpac is by far the best of the big four banks.

Interestingly, public sector funds are the laggards here. The Future Fund and QSuper – Australia’s biggest and third-biggest asset owners respectively – both score a D. Others scoring a D include NAB’s various super funds, Telstra and BHP Billiton’s corporate super funds, and industry fund REST.

How to prepare?

The report by Mercer, whose backers include industry super fund Cbus, provides practical ways of preparing for climate change.

The outcome of the Paris Climate Summit in December will make it easier for investors to prepare for the effects of climate change.

It attempts to model the possible affects of climate change in four categories: renewable energy technology; the effect of temperature rises; the impact of extreme weather; and the effect of government regulation.

It models the categories in four different scenarios: the first, in which nations manage to limit global warming to two degrees; the second in which it’s limited to three degrees; and the third and fourth in which global action fails (the only difference between the two being the effects in the fourth scenario are more extreme).

In all these scenarios there will be effects, though Mercer says the first scenario, in which global warming is limited to two degrees, would be the best and least volatile for investors. That’s the outcome that the fossil fuel industry is doing everything it can to avoid, and that by and large institutional investors are making no effort to bring about.

The report gives advice on which asset classes will be most affected in each scenario and category.

While the report is very thorough, the fact that there are so many unknowns involved is enough to put off many investors. The financial sector, after all, isn’t exactly known for its foresight. The monumentally irresponsible behaviour that led to the GFC is a case in point; and if you believe that the industry has radically changed its ways since 2008 then you’re living in a fantasy land.

But according to Mercer’s, “the real issue is that climate change is evident – the the scientific and economic evidence is compelling – and investors have enough information to take this seriously. You can also argue that funds have a fiduciary duty to address the risks.”

*Disclosure: AustralianSuper, HESTA and Cbus are part-owners of The New Daily.