12 December 2012 — Local Government Super, which has one of the most impressive track records in sustainable retrofits of older buildings, has snatched top ranking in a new index from The Climate Institute of how 300 of the world’s biggest institutional investors are managing their exposure to climate risk. Another five Australian funds ranked in the top 10 of the index.

But outside this thin leadership group, the outlook is grim for climate risk preparedness and resembles a sub-prime crisis waiting to happen, the institute said.

A total of 1000 pension funds, insurance companies, sovereign wealth funds and foundations/endowments were invited to participate in the Asset Owners Disclosure Project, but only 17 volunteered their information. Data for the balance of the 300 funds detailed in the index was culled from publicly available records.

The survey focused on five main categories – transparency, risk management, investment chain alignment, active ownership and low carbon investment.

AODP chairman John Hewson said the results were a “disturbing overall picture of greenwash and reckless mismanagement”.  The survey found many funds didn’t even have a climate policy and many that did hadn’t changed investment decisions as a result, he said.

ADOP chief executive Julian Poulter said the scenario resembled another sub-prime crisis waiting to happen.

“We think that climate change …(could) impact whether these funds have the ability to meet their liabilities in the long-term,” he said. “(They) must accept there will be some sort of low-carbon economy tipping point that will resemble the sub-prime crisis.

“How they manage that rapid repricing event will determine their ability to meet their long-term liabilities,” he said. “Nobody will be able to stock-pick their way out of climate change.”

Joining LGS in the top 10 ranking were Australian superannuation funds CareSuper, Cbus Super, VicSuper, UniSuper and Australian Super. South Africa’s Government Employees Pension Fund was second in the index, and was one of only two AAA rated funds, along with LGS.

LGS chairman Peter Lambert acknowledged that getting to the top position was the result of hard work over a decade, and making tough decisions. In property LGS has managed to outperform many property owners with a series of upgrades of older building, 6 star NABERS energy ratings and energy use slashed by an average of almost 50 per cent.

So how did LGS they do it?

LGS’s responsible investment portfolio is not big, just $3.3 billion, or around half of the $6.5 billion in total, but according to CEO Peter Lambert, the ADOP ranking is the result of a decade of hard work and determination to not shy away from tough decisions.

“We’ve been working steadily to build a sustainable portfolio for over 10 years, and we are well recognised as a leader in Australia,” Mr Lambert said.

“To see our initiatives being recognised on a global scale is a real honour, and it is great to see an Australian fund ranking number one in the world in such an important area.”

The portfolio’s responsible investment strategy has a holistic approach and is “in  line with environmental, social and governance principles across all asset classes, not just a few that might be considered easier”, Mr Lambert said.

Included are Australian and international equities, property, absolute return, private equity and sovereign bonds.

“This reflects our long-held belief that sustainability must be a key consideration for any organisation pledged to deliver returns to investors over horizons in the order of 40 years or more.

“LGS accepts the science around the human impacts on climate change, particularly through the burning of fossil fuels.

“Our sustainable/socially responsible Investment policy views climate change as the most significant environmental risk affecting investment returns.  It is a complex area, and we are developing strategies that attempt to address these risks and provide strong, long-term returns for our members.”

Key initiatives included:

  • Extensive transparency, disclosure and public reporting on climate change and its impact on LGS’s investments, including carbon footprint analysis
  • Significant investments in private and public companies developing low carbon and cleaner products and services – “an area seen with strong growth in the future”
  • A flagship green direct property portfolio, with properties extensively refurbished and an average of 47 per cent reduction in energy use since 2009, with properties rated the maximum 6 stars NABERS energy
  • Specific allocation of up to 15 per cent of the government bonds portfolio in primarily  AAA rated green or climate bonds issued by agencies such as the World Bank, European Investment Bank or Asian Development Bank
  • Active ownership, with a specific focus on exercising nfluence as a shareholder and bondholder to engage and vote on companies where we are concerned with their approach to climate change risk management
  • Introduction of Sustainable Australian Shares as one of the fund’s new single sector investment options, which feature an exclusion on companies involved in coal mining

LGS was also actively involved in organisations such as the United Nations Principles for Responsible Investment, the Investor Group on Climate Change and the AODP project. “Climate change is a global concern and asset owners such as super funds play a key role to responding to these issues,” Mr Lambert said.

AODP will release more detail from the survey in the coming months and will survey global funds again next year. Details from the Australian pilot surveys can be found here.

The full index is available through the AODP website.