Super funds with $1 trillion in assets push for action on climate

Big companies face increasing pressure from superannuation funds to provide detailed modelling of the risks to their business posed by carbon pricing or temperature rises.

BHP Billiton is at the forefront of the trend for companies to respond with more sophisticated climate change risk reporting. Now the heat is on for smaller resource companies to follow suit, ahead of the trend spreading to less-exposed sectors.

“In the coming years most companies will have to prove to investors how sustainable their exposure to climate risks are in the long term,” Catholic Super chief executive Frank Pegan said.

The fund has recently begun trying to map the carbon footprint of the more than $7 billion worth of assets held on its behalf by external fund managers.

“As a starting point we have asked all our fund managers to engage with the companies they are invested in on our behalf to make sure they have considered the risks of climate change to their business model and have a plan to deal with it,” Mr Pegan said.

He said the fund’s focus on climate risk had more to do with economics than reacting to recent comments made by leader of the Catholic church, Pope Francis.

“The Pope’s 2015 encyclical on climate change is all about showing respect for the earth and people, which is in line with the approach we have already been taking”.

Global momentum

“The world’s energy mix is changing dramatically and companies that don’t evaluate how they are going to deal with that will find themselves in real strife. Just look at what has happened with Glencore’s recent share price collapse when it needed to raise more money”.

Mr Pegan also chairs the Investor Group on Climate Change (IGCC), a collective of Australian and New Zealand super funds, fund managers and insurance companies managing $1 trillion in assets.

ANZ Banking Group said on Tuesday it will set strict rules on lending to the coal industry to bring the bank’s business into line with the growing momentum across the corporate world of reducing carbon emissions.

The changing nature of the climate risk modelling and reporting metrics demanded by institutional investors will be a key topic at the 2015 IGCC summit, to be held in Melbourne on Tuesday and Wednesday.

“At this time of great disruption, whether you divest, invest or engage, it is clear that all investors need a strategy for carbon. Investors are building the tools they need to manage risk and capture new opportunities. There is no turning back,” IGCC chief executive Emma Herd said.

Ahead of the 2015 United National Climate Change Conference, in Paris from November 30, participating countries have flagged an agreement to commit to a goal of limiting the rise in average temperature since the industrial revolution, already at 0.9 degrees to 2 degrees .

“After the Paris summit expect to see a huge jump in the sophistication of carbon-risk reporting,” Ms Herd said.

“Trillions of dollars in capital will move out of some industries and into others as the world economy pivots around the need to limit global warming to 2 degrees”.

Bank of England governor Mark Carney last week issued a waning to investors that the majority of the world’s fossil fuels could become “stranded”, meaning resources companies are due for a big fall.

BHP Billiton on front foot

Local resource companies are already struggling with the shift.

AGL Energy chairman Jerry Maycock used the company’s annual general meeting last week to call for a “coherent national plan” to shift the country’s electricity generation sector away from fossil fuels.

At a briefing for about 40 investors on Friday BHP Billiton revealed the results of financial stress tests it had modelled for the impact of 2 degrees, 4 degrees and 6 degrees average temperature rises on the business.

BHP Billiton has also modelled the impact on its balance sheet of a range of different carbon prices.

The demerger earlier this year of BHP Billiton’s most carbon intensive assets into a new entity named South 32 had also improved the resources giant’s climate risk profile, AMP Capital head of ESG investment research Ian Woods said.

“Carving out the aluminium assets into South 32 has enabled BHP Billiton to reduce its carbon emissions by around one third, in exchange for a relatively small drop in market capitalisation”.

AMP Capital is aiming to improve the financial modelling of the climate risks in its portfolio, which has led to increased demands for information from the companies it is invested in.

“We want boards to show us that they have modelled the the potential impact of temperature rises and carbon pricing on their balance sheets, and have a started thinking seriously about what they could do to minimise that impact,” Mr Woods said.

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