VicSuper, the A$23.7bn (€14.5bn) Australian not-for-profit superannuation fund, says it has calculated that more that 14% of its real assets holdings are under threat from natural hazard risks following an initial assessment that will feed into engagement with its asset managers.
It has also noted, in its new Climate Change Report, that some sovereign nations – though it only mentions Australia – may be sensitive to the impact of physical damages. It’s one of a suite of four reports released today; the others are its main annual report as well as publications on governance and materiality.
It has created an inventory of its real assets investments and their location and assessed their risk rating under historical natural hazard event probability.
“Climate change and extreme weather are projected to reduce property values by A$571bn by 2030, A$611bn by 2050 and A$770bn by 2100,” the fund said, citing the Climate Council.
“In view of this risk, we have commenced work to understand the exposure of our real asset investments to physical risks including earthquake, storm and flood risks at the individual asset level.”
The first stage involved preparing an inventory of its “hundreds of real assets investments”.
The fund went on: “The results indicated that 14.4% of the value of our real asset investments are exposed to extreme risks. These predominantly relate to earthquake risk exposure of properties in New Zealand and San Francisco, and flooding risk exposure of Queensland-based assets.
“Given that these risk ratings relate to historical event probabilities it is likely that assets have been appropriately designed to withstand these type of events.”
The next stage of the process will be to “assess the real asset risk rating under projected climate change scenario event probabilities (including extreme damage models)”.“We intend to use the findings to engage with asset managers to understand how these events would impact operational and capital expenditure requirements, insurance and operability, and then work with the managers to implement any necessary resilience plans.”
VicSuper, which traces its roots to a public sector fund for the state of Victoria, found that at an “aggregate level” out to the year 2100, developed market equities are expected to be relatively unaffected, with some opportunities in the near term.
“In contrast, emerging market debt and high-yield debt are likely to be most sensitive. Some sovereign nations may also be sensitive to the impact of physical damages, like Australia for example.”
“We intend to use the findings to engage with asset managers”
The fund has started to work to further embed the financial risk due to climate change into strategic asset allocation, by formally including climate change scenario analysis as part of an annual strategic review. This was previously conducted as a stand-alone process.
The Melbourne-based investor said it has already met its mid-2020 target for having A$3bn (12% of its entire portfolio) invested in sustainable outcomes.
According to its Materiality Report – which ranks key issues in order of importance – the most pressing concerns faced by the fund relate to the payment of retirement benefits to members. This includes industry competition, geopolitical instability and investment strategy, governance and performance.
Climate change-associated risks were identified as an emergent but not “key material issue”, as was modern slavery and human rights, Aboriginal and Torres Strait Islander (indigenous communities) engagement, the gender pay gap and privacy and data security.
With reporting by Khalid Azizuddin.