For more than a decade, as part of the Carbon Disclosure Project (CDP), investors have been asking the companies they invest in to disclose their carbon emissions, in theory so that they could get a better idea of the exposure of their investments to climate change risks and reduce that risk accordingly.
But while this disclosure has driven significant changes in the behaviour of many of the companies they asked for the information, you would have been hard-pressed to see any meaningful changes to how the investors themselves behaved.
This is not just because there have been few changes – although that certainly seems to be the case, notwithstanding a couple of high-profile pledges last year by Storebrand and Rabobank to sell out of their investments in fossil fuels – but also because the transparency that institutional investors have demanded of companies has been singularly lacking in their own industry.
A growing number of investors recognise the danger that climate change risks pose for the companies they invest in, yet they do not seem to have translated that into the danger for their portfolios, which are made up of investments in these companies, and therefore to the pensions they are able to provide for their beneficiaries even though some 55% of the average portfolio is exposed to climate risk.
Given the success of the CDP, which started out in 2003 asking 500 companies for details of their emissions on behalf of 35 investors with $4 trillion under management, and last year surveyed 5,000 companies on behalf of 722 investors with $87 trillion of assets under management, it was only a matter of time before the principle was extended to asset owners and the portfolios in which those companies’ shares sit.
The Asset Owners Disclosure Project (AODP) is not affiliated to the CDP (it is run out of Sydney while the CDP is based in London), but it uses the same deceptively simple principle of asking organisations for information and reporting on it. It started in a similarly low-key fashion, too. The first AODP report, issued last year, sent out requests for information to the 1,000 largest retirement funds, insurance companies and sovereign wealth funds, which between them managed more than $60 trillion. However, the organisation correctly “anticipated difficulty in obtaining voluntary disclosure from an industry renowned for its conservative nature and lack of transparency” and it therefore went ahead and analysed over 300 of the largest asset owners based on publicly-available information with out waiting for their responses.
What it found was eye-opening. “A large proportion of funds appear to be doing nothing at all to specifically address climate change. Of the 314 funds assessed, almost one-third scored zero, with no public information at all regarding efforts to manage climate change-related issues,” the report said. “Where funds have a policy, there is often no evidence that this has led to any material deviation from existing investment strategies or resulted in any direct attempts to mitigate climate risk in their portfolios. This leads us to conclude there is a considerable degree of ‘greenwash’ within the industry.”
Only one fund, South Africa’s Government Employees Pension Fund (GEPF), had calculated its exposure to fossil fuel reserves via the balance sheets of its investee companies.
Since that first report was published, organisations such as Carbon Tracker, 350.org and the Smith School for Energy and the Environment at Oxford University have highlighted the risks of fossil fuel assets becoming “stranded” because of climate change and efforts to deal with it, and the UN climate chief has warned that investors can no longer ignore the costs of climate change.
The second report, released at the end of last year, suggests the industry is slowly taking on board the dangers of ignoring their climate change exposure, says Julian Poulter, executive director of the AODP. “I’m pleased with the momentum building in the industry. For the first time, we had full disclosure from some of the very biggest US funds such as Calpers and AFL-CIO as well as insurance companies such as Axa Group,” he says. “And there were a bunch of others who said they’re not quite ready this year, ‘but count us in next year’.
“The realisation is fast emerging even among those elements that have resisted for some time that the disclosure game is up,” he adds.
One reason is that pension fund members are starting to put pressure on funds to answer the questions the AODP is asking. A mere 24 of the 1,000 funds contacted by AODP responded directly – just 2% of those they asked to reply. But in a pilot project in Australia, Canada and the UK in which the AODP is attempting to mobilise pension fund members through a campaign called The Vital Few (of which more in a future article), 34% of funds contacted by their beneficiaries provided the information. “A lot of funds have started to realise that they can tell us to go away, but they can’t do that to their members,” Poulter points out.
John Hewson, chairman of the AODP, adds: “What was once a sleepy industry is discovering the pressures of a new era, where funds at the top of the index are beginning to actively monitor their unburnable carbon and hedge their portfolio risk against the many uncertainties of climate change and those at the bottom stick to what they have always done and guarantee themselves an increasingly tense and public relationship with the members they claim to represent.
“Unlike the sub-prime crisis and previous market upheavals, they will find no protection from the complexity of their industry and their refusal to question their own out-dated investment models and other investment sacred cows will be proved a dereliction of duty. Time is running out for them to begin this change as the leaders are beginning to move ahead at an impressive pace,” he adds.
Nonetheless, there is still a long way to go. Just five funds – the Environment Agency Pension Fund (UK),Local Government Super (Australia), CalPERS (USA), PFZW/PGGM (Netherlands) and VicSuper (Australia) gained a AAA rating, although this was an improvement on last year’s two, while 173 funds were given an X-rating, “awarded when AODP could discover absolutely nothing at all about how a fund was managing climate change risk” and a further 191 disclosed very little.
“I can’t think of an industry less connected to its customer base, even though for many people a pension is their second-largest asset after a house,” Poulter says. “It’s been such a sleepy industry that no-one has tried to hold it to account before. But while people continue to be incredibly bored by pension funds, they are very excited about bringing the largest financial institutions to account.”
And as 2014 progresses, it looks like those institutions are going to find themselves facing increasing demands to be more transparent thanks to the activities of the AODP and a new generation of concerned pension fund beneficiaries.