An unfortunate side-effect of action on climate change
Buoyed by renewed global enthusiasm for climate action after the Paris Agreement and the US-China Joint Presidential Statement on Climate Change, the financial community is increasingly turning its mind to what happens when governments act to limit greenhouse gas emissions. Previously, fossil fuel companies had planned to develop approximately five times the amount of fossil fuel than we can safely burn if we are to prevent an average temperature increase of more than 2°C. Capital has been and will continue to be wasted on carbon intensive projects that should not proceed under the new regime; a reality that the market is beginning to wake up to. When this reality truly strikes investors, it may prompt a dangerous market-wide share sale in fossil fuel companies and precipitate a decline in those companies’ market values.
Australians with superannuation fund accounts stand to lose money when this carbon bubble bursts, because most superannuation funds invest in blue chip energy and resources companies such as ExxonMobil, BP, Shell, AGL, Santos and their financiers, large global banks and our Big Four banks in Australia; NAB, Commonwealth Bank, ANZ and Westpac. If and when fossil fuel companies suffer economic hardship because their projects are no longer viable (see, for instance, the bankruptcy of Peabody Energy in mid-April 2016), superannuation members will lose out. As the Asset Owners Disclosure Project Chair and former federal leader of the Liberal Party of Australia, Dr John Hewson, put it, the eventuation of climate risk could “easily precipitate a financial crisis”. Having put its support behind UN action on climate, the G20 has begun turning attention towards how to prevent such a crisis.
Why the risk of stranded asset persists
We all have a degree of leverage to ensure our concerns over the management of climate risk are addressed through our “consumer sovereignty”. Most Australians could easily change superannuation funds to those that are mitigating climate change risk in their investment portfolios. Like any market, if people demand a certain product, it is often supplied by budding entrepreneurs. However, it can be difficult at the best of times to understand whether one superannuation fund is better than another at managing its investment portfolio, let alone climate risk. Considering that many funds present their climate-related information in different ways, and use different metric systems of measurement, it is a tough task to make meaningful comparisons. This presents a concerning information and comprehension gap for consumers that has to be filled.
The G20’s big move
The challenge of providing transparency on climate risk to the financial sector has been recently taken up by the G20, which has asked the Financial Stability Board (‘FSB’) to examine how the financial system can better acknowledge and consider climate change risks. The FSB, made up of the finance ministers and central bank governors of the G20 countries, is a soft law body established in the wake of the Global Financial Crisis which aims to ‘assess vulnerabilities affecting the global financial system and identify…the regulatory, supervisory and related actions needed to address them’ (Art 2(1)(a), FSB Charter).
The FSB has, in turn, established a new Taskforce for Climate-Related Financial Disclosures (‘TCFD’), and appointed three-time mayor of New York City and businessman Michael Bloomberg, to lead the initiative. Its mission is to ‘develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders’. In its Phase I report (p 2), the TCFD concluded that disclosure by companies currently is ‘fragmented and incomplete’, and this is preventing ‘investors, creditors, and underwriters from accessing information that can inform their decisions’.
Most significantly, the TCFD announced in its Phase I report (p 26) that it will now examine voluntary, common disclosure standards for institutional investors. This will make disclosure frameworks part of the mainstream consciousness of the superannuation sector.
One model for the TCFD to consider is the Asset Owners Disclosure Project (AODP). The AODP aims to rectify the information and comprehension gap, by producing rankings and ratings of the world’s 375 largest superannuation and pension , as well as insurers and sovereign wealth funds, in regard to their management of climate risk. This initiative establishes transparency and comparability between pension funds by using a quick and easy-to-use scale. It encourages pension funds to take the initiative to file shareholder resolutions, which request that companies’ business models comply with a low-carbon economy, create innovative ways of financing renewable energy and reduce exposure to fossil fuel assets.
The forthcoming TCFD disclosure standards will give individual superannuation fund members a bigger source of leverage to demand that climate risk is managed properly. In turn, this will continue to drive competition between superannuation funds and their suppliers, which can only mean better outcomes for members. The information and comprehension gap appears to be closing swiftly and comprehensively. By focusing on transparency and disclosure, the G20 may well consolidate recent climate action successes with the assurance that the transition to a post-fossil fuel world can be more financially stable too.
Joshua Sheppard is a penultimate year law student at Monash University and a project manager for the Asset Owners Disclosure Project.