TODAY’S STUDY: INVESTMENT FUNDS AND CLIMAGE CHANGE RISK
The Asset Owners Disclosure Project Global Climate Index 2013-14 December 2013 (Asset Owners Disclosure Project)
In a year when understanding of a fund’s exposure to unburnable carbon and emissions intensity became a mainstream investment issue, the measurement of progress to managing climate risk takes on an even greater significance. This is particularly important as the stakeholders in these funds, especially pension beneficiaries, have started to create significant public pressure to manage these risks.
The Asset Owners Disclosure Project (AODP) 2013-2014 Global Climate Index is built from data acquired directly from the 1000 largest asset owners which are invited to respond to the survey; from the members of those funds, and by a research team using publicly available information.
The AODP 2013-2014 Global Climate Index includes data from the four types of asset owners; pension and superannuation funds, insurance companies, sovereign wealth funds and foundations, endowments and trusts.
The AODP research team use the collected data to score and rank the funds according to the AODP ratings methodology which uses multiple data sets across five main aspects of an asset owner’s climate change performance:
2/ Risk Management
3/ Investment Chain Alignment
4/ Active Ownership
5/ Low-Carbon Investment
Using all available data, the AODP ratings team then rated 458 of the 1000 largest asset owners invited to respond to the survey. In 2013-2014, the 458 asset owners surveyed comprised: 359 pension or superannuation funds; 53 Insurance Companies; 33 Sovereign Wealth Funds; 12 Endowments, Trusts or Foundations; and 1 pension fund administered by a labour organisation.
The AODP calculated the 2013-2014 Global Climate Index based on the ratings methodology. There were minimal changes in the rating methodology from 2012-2013…Table 01 summarises the characteristics of the 458 asset owners surveyed for the 2013-2014 survey…
A Crisis Of Transparency Still Exists
24 asset owners submitted direct disclosures in response to 2013-2014 survey, an increase in the response rate of 41 per cent compared to last year. This total is still only 2 per cent of all asset owners invited to respond to the survey.
However, The Vital Few pilot in Australia, UK and Canada received responses from over 34 per cent of the asset owners contacted by members indicating that this transparency issue may be significantly improved within two more years with a global expansion of member based pressure.
A Disclosure Premium For Asset Owners
The 2013-2014 survey found that a disclosure premium exists for asset owners. Generally, asset owners who responded to the survey or to members through The Vital Few were over-represented in the top 27 asset owners which scored an A rating or above.
Low-Carbon Not Low Performance
There is no evidence at all that the leaders in the AODP Index are sacrificing members returns even in the short-term and even when they are actively underweight high-carbon and overweight low-carbon investments and thus looking to stabilise their portfolio in preparation for future potential problems as the world economy transitions to a low-carbon model. An analysis of the AAA rated funds shows that none of these funds are near the bottom quartile of returns in their country. See Table 02 for more information.
The Polarisation Of Asset Owner Performance Is Increasing: A High Majority Of Assets Owners Are Severely Lagging
Table 03 shows the number of asset owners in each rating category and compares the 2013-2014 survey findings to the 2012 survey findings.
Five pension funds, Environment Agency Pension Fund (UK), Local Government Super (Australia), CalPERS (USA), PFZW/PGGM (Netherlands) and VicSuper (Australia) received an AAA rating in the 2013-2014 survey.
The two highest ranking insurance companies, the UK’s Aviva and Norway’s Storebrand ASA, both received an AA rating this year. This was an improved rating for both companies.
A total of 27 asset owners scored an A rating or above compared to 22 last year. Table 04 lists these 27 asset owners.
At the other end of the scale there is an alarming increase in the number of laggard funds. This year’s new X rated category was awarded to 173 funds or 37.6 per cent of the total surveyed group.
This rating category was awarded when AODP could discover absolutely nothing at all about how a fund was managing climate change risk. A further 191 or 41.5 per cent of funds scored a D rating. Thus, the proportion of surveyed asset owners which disclose very little or no information has increased from 70 per cent in 2012 to 79 per cent in 2013-2014.
Overall industry performance decreased once more medium sized asset owners were rated. The 173 laggard funds are listed in Table 05.
Pension Funds Accelerated Their Superiority Over Other Asset Owners
Pension funds had 87 of the top 100 funds, outweighing its representation of surveyed funds. Insurance companies rated in line with their overall representation in the Global Climate Index. However sovereign wealth funds and foundations rated poorly in comparison, with the leading foundation not making the top 100. See Table 01 for further information.
Leading Asset Owners Acknowledge That The Market Has Not Accurately Priced The Risk
Leaders acknowledged that carbon pricing will rise at some point and that there is a lack of risk premium attached to high-carbon investments in the liquid markets of equities and some fixed income instruments. The uncertainty that exists for those high-carbon exposures is driving these leaders to analyse their portfolios for the exposures than can be easiest offset. For example, many funds have publicly stated their fear for coal and high cost tar sand extraction as well as coal fired electricity generation and some have begun to actively tilt their portfolios away from some pure play or smaller companies in these areas. As part of their risk strategies, some leaders have begun to look at an active hedging strategy by both tilting away from these high-carbon exposures but also by further investments in low-carbon assets, even in some cases lowering their risk return hurdles for these investments in the belief that their hedging potential creates real value for their beneficiaries…