On Tuesday this week (March 17), a petition signed by over 10,000 stakeholders was presented to José Meijer, vice chairman of the ABP board, during a debate in Amsterdam. An initiative of ABP members, supported by FossilFreeNL, the petition urges ABP to get serious about the looming carbon bubble. According to Climate Central analysis reported in the New York Times, climate change will be extremely bad news for the Netherlands. The nation’s flooding risk is nearly double that of the next country and four times that of Japan in fourth place. These are not welcome numbers and will require incalculable adaptation costs that dwarf any mitigation costs the country would incur. The implications for Dutch pension funds are severe. At precisely the time when the world realises that the physical impacts are getting rapidly worse, its population will also decide to aggressively take action and price carbon – this is the sub-prime crisis all over again but with climate change. It is our ‘sub-clime’ crisis. For Dutch pension funds exposed to both risks, this is a double-whammy and such a massive problem that it requires attention many years before its potential onset. While the physical impacts of climate change will increase over the long term, the most severe short to medium term damage to portfolios will largely be caused by the economic impacts of regulation and innovation. Indeed, the scary thing for all pension funds is that there are multiple pathways to the low-carbon economy and any one of them could expose the high-carbon investments they hold. While the US congress may well continue to block international climate regulation, China alone could drive the low-carbon economy. Collaboration between progressive economies could also tilt the balance, as could innovation, leadership from large sectors or capital re-allocation from just a few large funds.
The worst fear of investors, however, is not proactive policies that large fossil fuel based corporations have become expert in influencing, but reactive policy driven by some uniquely nasty extreme weather pattern or rapid deterioration in climate data. We should remember the large switch in public opinion towards climate change after Hurricane Sandy brought a taste of future climate change to New York. That issue was successfully dampened by skilled public relations professionals paid for by vested interests. But similar or worse events might yet switch public opinion in the US, and if they do, every pension fund on the planet will need to be well prepared to cope with the stranded asset fallout. Not all economies have the ability or scale to ride such massive change as the USA.
For the first time this year the Netherlands’ largest pension fund ABP has fully disclosed its climate change risk strategies to the Asset Owners Disclosure Project (AODP). It is one of an increasing number of funds using new expertise to look forward with judgement rather than just backwards with spreadsheet models in order to avoid the worst ravages of climate risk.
Around 50 percent of an average pension fund portfolio is exposed to climate change in a material way with only around 2 per cent in low-
carbon assets. This is a staggering 25-1 bet on business as usual, or if you like about the same odds as drawing an Ace of Spades or Clubs in poker. This is an imbalance that requires urgent attention.
It is time for the Dutch no-nonsense attitude to prevail over the conservative cultural resistance of countries like the UK and the vested interests of countries like the USA. Staring at a climate double-barrelled shotgun must force an immediate reduction in high-carbon investments, a serious discussion with Shell and other exposed blue chips around immediate diversification, and a new allocation to low- carbon investments, so thatwhen the inevitable sub-clime crisis begins there is some bright news for Dutch members. Pension funds do not need government policy to kick-start this basic level of member protection.
The alternative is for Dutch pension funds to just wait for the crises to hit and simply point to the fact that Vietnam and Thailand are second and third in the bad news table. I suspect that this is not the Dutch way and that within a short time Dutch funds will provide the kind of example that many other international funds will start to follow. For that, the world will be truly thankful, but more importantly so will Dutch members.
Julian Poulter is CEO of the Asset Owners Disclosure Project