Climate change might be infiltrating investor conversations at every level but the big question is, will investors abandon their sustainability ambitions to deal with the financial shocks of the pandemic?
This is a conversation that JANA, an investment consulting firm that advises some of the country’s largest super funds and insurance companies (around $600 billion in assets worth), is having with many of its clients, according to head of responsible investment research Tim Conly.
Conly, who heads the firm’s five-person responsible investment team (there’s aligned capability scattered throughout the business, however), says it’s hard to know what will happen, with the government in a position to go “two ways” in how it chooses to stimulate the economy.
“It’s a point to watch,” Conly told The Fifth Estate.
Although there’s been a rising chorus of voices asking for the government to use this opportunity to double down on Australia’s sustainable future – including calls from chief scientist Alan Finkel to boost Australia’s energy efficiency game – but at the same time, National Covid-19 Coordinating Commission is advocating for a gas-powered recovery.
But according to new research by Conly’s firm with the support of specialist researcher Climate Insight, future investment returns are expected to take a big hit from climate change, made worse if the government’s emissions-reducing policy settings aren’t kicked up a gear.
Scenario modelling found that returns from a typical superannuation fund would diminish by 2 per cent (dropping from the standard super fund portfolio that yields 8.3 per cent a year) if the existing regulatory settings around emissions aren’t tightened.
The research also found that investors aren’t happy with the government’s response to climate, with nearly nine in 10 respondents agreeing that the government should take more action to address climate change and had provided insufficient certainty to investors on the issue.
There’s also no doubt in investor’s minds that climate change is threatening their returns, with more than 80 per cent of respondents believing climate change presents a real risk to investment and long-term portfolio outcomes.
These risks come in the form of physical threats, such as damage to assets and indirect impacts through supply chain disruption, as well as transition impacts that involve switching to new policies, technologies and markets as part of the transition to a low carbon economy.
It’s not easy to think long term
On why investors – and people more generally – have been slow to act on climate change when compared to the coronavirus pandemic, Conly says it’s “hard for people to visualise and grasp longer term things.
“It’s just human nature.”
He says the key to change will be unlocking the insurance mindset that recognises “the cost of doing nothing is more than the cost of doing something”.
“We need to get everything into that mindset.
“The longer the delay in coordinated action to address climate change, the greater the likelihood of the impacts of climate change become more material,” he says.
The report notes that in the most extreme instance, government inaction on climate change could result in a “shutdown akin to the actions taken to address COVID-19”.
This is why earlier “coordinated action” is preferred, the report states.
Financial hardship felt under both scenarios, but inaction is worse
The research was based on a couple of different scenarios: The first being a business-as-usual model where we end up with a 3 degree increase in global temperatures, and the second charts a “more aggressive” policy response and technology development that keeps long-term temperature rise to 1.8 degrees.
The researchers recognise that there will be hardship felt under both scenarios, but under the “good scenario” a somewhat insignificant loss in returns of around 0.4 per cent a year would be felt over twenty years.
By contrast, Dr Danyelle Guyatt from Climate Insight says the “cost of doing nothing is projected to be greater in the long term”.
Guyatt says these findings build the case for portfolio diversification to “build resilience across a range of climate-related scenarios.”
Thanks for the comment, something to look into for sure.
I find this article to be ironically timely given JANA advises REST (who is being taken to court for their failure to manage and disclose their approach to climate change risks). JANA has had a long-standing influence over REST, and they don’t seem to be doing much! It will be interesting to see the investment committee minutes when they’re shared with the court and how JANA advised REST on this issue (as a fiduciary matter).