We need real transparency from asset owners on their climate change responses

The world of retirement savings needs external competitive pressure if it is to step up to the challenge.

In modern democracies, institutions of all types trend towards greater transparency: government departments are bound by Freedom of Information requests, their agencies are being forced to reveal details of operations that would have been unthinkable years ago, and private companies are under continuous market disclosure. But the largest industry on earth has so far escaped this trend towards transparency. The retirement savings market (including regulated pension funds) has come under little pressure to reveal how our retirement savings are managed, especially around the vitally important issue of climate change. This is about to change. At the end of 2012, the Asset Owners Disclosure Project (AODP) released its first Global Climate Index showing, according to a mixture of both survey responses and public information, who is doing what to manage the looming portfolio destruction caused by climate change. Why do we need it? Because no other global issue has the singular ability to leave so many pension and superannuation investments devalued. If, more than 20 years ago when climate change first came to prominence there was a chance that a smooth risk transition to a low carbon portfolio could occur, that chance has now certainly disappeared. We still have no idea whether policy, innovation or investor reallocation will drive the path to the low carbon economy that will trigger this investment portfolio crisis. But when it comes, along with the inevitable economic and socialconsequences, the generous returns provided by the fossil fuel-based industries will disappear quicker than we can imagine. The ensuing capital flight will send asset owners and managers into new territory once the Spanish Inquisitions begin.
All asset owners and pension and superannuation beneficiaries are going to lose from this inevitable systemic crash. But the real question is who is going to lose the most and what can asset owners do to limit the damage. After all, asset owners can’t entirely screen out fossil fuel-based or high emitting assets. So, what does an orderly investment switch look like on such a uniquely massive scale? The one thing that defines efficient markets and institutions is information via transparency: markets survive by the information provided by and about the players in that market. No-one is suggesting that the pension industry is close to being a true market with level competition. But, the Global Climate Index starts to address the competitive issue around the capacity to manage climate change. While there is, in some jurisdictions, good data on asset owner returns, there is little data on the key issue of managing climate risk. It is fair to say that the evolution of PRI and CDP has created a ‘phoney war’ in the area of climate risk management, where as part of a broader ESG or responsible investment strategy funds tout and market their responsible investment credentials. It is the closest thing to competition the asset owners have got as they
strive, albeit collaboratively, to be seen to be leading in this area. Some have even put ESG integration statements onto their websites along with sustainability reports and marketing literature, as if this is on a par with making real investment changes to ensure their portfolio is more sustainable than those of their peers. Let’s be clear, there are some very good examples of how funds are managing climate risk and the plethora of ESG and responsible investment conferences, which seem to dominate the industry landscape, are full of speakers and delegates each with their stories of leadership in proxy voting, sustainable investment or climate risk management. The real issue is that we have no idea whether these efforts in aggregate are any better than any other fund.CalPERS is a perfect example. No-one really doubts their leadership, or that they have built sustainability capacity, and are trying to manage climate risk and invest in low carbon assets. CalPERS’ website proudly announces such initiatives.But look at the numbers. Against the average 2 per cent of a portfolio invested in low carbon assets for the industry, can you tell if they are overweight or underweight carbon intensity, fossil fuel exposure or low carbon investment relative to any other fund? No. We can’t either. Some may argue that it isn’t fair to pick on CalPERS given their relative leadership position. But this is precisely the point: if they want to be leaders, then let them encourage action in the laggards by being transparent. Then, we can all sit together on one side criticising the genuine laggards who refuse to sign up to CDP, PRI or an investor group or refuse to make even the most basic disclosures. The asset owners are the top of the capital tree and the leaders amongst them are therefore the top of the top. We all need them to act in a way that makes them bastions of best practice and flag bearers for competitive market comparison. Anything else is just greenwash.