Tackle climate change or lose investors, companies warned

Australia's bushfire crisis has inflamed debate on climate change and louder calls for action are tipped to force companies to reduce their carbon emissions or risk losing big investors.

Australia’s emissions of carbon dioxide (CO₂) per person in 2013 were nearly twice the average of countries in the OECD. Australia’s very high emissions largely reflect the nation’s heavy reliance on coal and other fossil fuels such as natural gas for energy.

Larry Fink, the CEO of BlackRock, the world’s largest asset manager, rocked the investment world last week by using his letter to CEOs to flag climate change as the most pressing risk facing investors.

Awareness of climate change is rapidly changing and the world is about to experience a fundamental reshaping of finance and reallocation of capital away from carbon polluters, Fink said.

“In the near future – and sooner than most anticipate – there will be a significant reallocation of capital,”  Fink said.

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios … Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself.”

'In the near future – and sooner than most anticipate – there will be a significant reallocation of capital': BlackRock chief executive Larry Fink

BlackRock has recently joined Climate Action 100+, which represents 370 global investors with more than $US41 trillion ($59 trillion) under management.

Founded in December 2017, the group is an investor initiative formed to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

It is targeting 100 “systemically important emitters”, accounting for two-thirds of annual global industrial emissions, alongside more than 60 others with significant opportunity to drive the clean energy transition. 

Local funds use strong voice

Locally, AustralianSuper is also a member of Climate Action 100+. The industry fund is one of five founding members of Climate Action 100+.

As a large asset owner, AustralianSuper says it has  a crucial role to play in driving the low-carbon transition across the global economy – and this includes engaging directly with companies to try to convince them to lower greenhouse gas emissions.

“Once we are an asset owner, we proactively engage with company boards and chairs and exercise our votes at AGMs to influence outcomes on climate change and other ESG matters,” says Andrew Gray, director of environmental, social, governance and stewardship at AustralianSuper.

“Adhering to ESG requirements promotes better investment outcomes and therefore better returns for our members,”

“Through this stewardship, we’ve been active on climate change for a long period of time and we expect that to continue. We also expect funds’ exercising stewardship on climate change to become more common.”

Companies responsible for carbon pollution who fail to respond to calls for action to reduce emissions could lose investor support.

"Investors will increasingly see large GHG emissions as an investment risk as the transition occurs to a lower carbon economy,” says Gray.

“Companies therefore need to reduce emissions or risk investors reallocating capital to lower emitting companies.”

AustralianSuper is also a member of the Investor Group on Climate Change, which includes Australia’s biggest institutional investors, helping them to integrate climate risk considerations into their investment processes.

The IGCC says the Australian bushfires highlight the risks of climate change, and its members will be getting more active on calling on companies to reduce carbon emissions to offset climate risk.

“Climate change is a financial risk of unprecedented scale and impact,” said Emma Herd, executive officer of the Investor Group on Climate Change (IGCC) and steering committee member, Climate Action 100+.

“The physical and economic threats of climate change have again been evident in the devastating and unprecedented bushfires raging across Australia,” she said.

Investor engagement with companies on climate change has accelerated in recent years amid greater regulator and community concerns about a warming planet. This trend is tipped to  persist.  

“As a result, we have seen investors collaborate through initiatives like Climate Action 100+ to constructively achieve company-level action to cut emissions, improve governance and increase transparency,” Herd says.

“This trend will only continue into the new decade. And companies that do not respond positively to reasonable investor engagement on climate risk and decarbonisation will be on notice. It is unclear at this stage whether this will lead to increasing shareholder voting on climate issues.

“Investors have a range of different options to achieve good climate outcomes with companies, from direct engagement and public statements to shareholder resolutions and divestment.”

AustralianSuper’s Gray notes that Australian superannuation funds, particularly industry funds, have long been active ESG investors and exercised stewardship on climate change.

When the United Nations-backed Principles for Responsible Investment was established in 2007, there were more Australian members than from any other country, and most were super funds.

Options for smaller investors

For retail investors, a Morningstar Sustainability Rating for funds helps investors make comparisons across industries and better understand and manage total ESG risk.

It provides a reliable, objective way to evaluate how investments are meeting ESG challenges. The ratings can be found on the right-hand side of fund quote pages on Morningstar.com.au.

Even if investors choose to simply incorporate the rating as an additional datapoint in an otherwise conventional fund selection process, more assets will go into the stocks of companies that do better on sustainability metrics, says Jon Hale, head of sustainability research for Morningstar.

The funds invested in Australian responsible investment funds sit at a record. The market continues to grow with associated assets under management up 13 per cent over the course of 2018 to $980 billion, according to the Responsible Investment Association Australasia.

This represents 44 per cent of total professionally managed AUM, which now sits at $2.24 trillion, according to the Australian Bureau of Statistics.