The Asset Owners Disclosure Project (AODP), recently declared climate change one of the primary influences over long term investment performances and outcomes.  The AODP is an independent not-for-profit global organisation and they have no ulterior motives in making this statement.  They exist to preserve long term investments, and especially retirement funds, and their research is totally objective.  They did not arrive at this conclusion lightly either – data harvested from 500 of the most powerful international asset holders was thoroughly reviewed and assessed to see how their funds performed.  These included insurance companies, endowments and obviously pension funds.  John Hewson, who is the AODP chair, and former Liberal Party leader, reported that financial institutions like banks and pension funds are treading on dangerous ground in their gross under-estimation of the ability climate change has, to set a global financial crisis in motion.  He was emphatic that the risk is one of the biggest yet, and the threat is growing daily.

Is AODP’s stance purely alarmist, or is there evidence to support their view in other quarters?  Evidently AODP is not alone.  Fossil fuel investments have seen a significant decline and this can be largely attributed to financial risk more than moral motivation.  High emission intensive companies are being considered extremely high risk, and products like thermal coal are not attractive to investors.  This is evidenced in market trends and if one looks at the first half of 2015 resource companies suffered significant losses.  For example, Rio Tinto was down by 18%, Santos dropped by a staggering 44% and Glencore showed a 24% reduction.

A Multiport SMSF Investment Patterns Survey conducted over the period ending in March 2015, showed that SMSF Trustees exhibited a definite preference for Australian shares.  SMSF portfolios were mainly comprised of local equities at 38.6 %, property (17%), Cash (16.5%), international shares (14.4%) and fixed interest investments at 13.1%.  If SMSF is anything to go by, local equities are clearly set to dominate the share market for the foreseeable future. Interestingly, the 2014 Benchmark Report conducted by the Responsible Investment Association Australasia indicated that core responsible investment funds in New Zealand and Australia had shown an increase of 13%.  The report also showed that responsible equities had outperformed the ASX300 index, and the large cap Australian equities fund average, four out of the past ten years. 

Warren Buffett got the attention of the stock market when he re-assigned funds on his own portfolio to align with his views on emerging market trends.  He is the undisputed champion of investment, and it would be prudent for SMSF Trustees to take cognisance of the trends being set by leading international investors.

What Does the Future Hold for SMSF Investments?

• SMSF trustees could benefit from noting how seriously leaders in global financial investments are taking the growing climate change risks.  Adding further weight to the implications of the AODP’s report, is the recent Mercer study, named “Investing in a Time of Climate Change”.  This report also accentuated the critical impact investment returns could suffer at the hands of climate change risk. Mercer recommended that investors re-evaluate their portfolios extensively, with a view to incorporating climate change risk into their financial planning.  The paradigm shift this would require for most investors, could be well rewarded in the long term, if they focus on tapping into the opportunities of climate change, as opposed to managing key downside risks. Mercer’s report is aimed at assessing the potential impact climate change will have on industry sectors, portfolios, and asset classes between 2015 and 2050.  The projected outcomes take climate change scenarios of  2°C, 3°C and two different 4°C rises in global temperature (above temperatures typical of the pre-industrial era) into account.   The Report’s Projected Outcomes Include: -Climate change will give investors opportunities for gains and losses.Climate change WILL have an impact on investment returns and savvy investors who take time to understand and mitigate potential risks stand to maximise opportunities it will yield at asset, industry and portfolio levels.
• Industry level faces top risk: Stakes will be highest at the industry level. For instance, Mercer predicts the average annual returns from the coal sub-sector could plummet by between 18% and 74% over the next 35 years, with effects being more pronounced over the coming decade (eroding between 26% and 138% of average annual returns over the next 10 years), depending which climate scenario becomes a reality..  Conversely, the renewables sub-sector could see an increase in average annual returns of between 6% and 54% over a 35-year period (or between 4% and 97% over a 10-year period), also subject to the climate scenario that materializes.

• Widely varying asset-class return impacts will be material: It goes without saying that defensive assets are less prone to sensitive climate risks than growth assets..

AODP’s Hewson warns investors to be proactive and not to rely on global leaders to mitigate portfolio risk against continuing political intransigence.  He recommends that asset owners take action in this regard and Hewson added that AODP takes the duty of minimizing portfolio risks upon themselves. AODP says the leading funds are aware of the “sub-clime” risk, and they observed that if every fund adopted AODP’s intentional reduction in carbon, climate change would be very positively impacted.