Avoiding the Climate Crash

Even if tomorrow, a global accord was struck to radically reduce emissions to keep us to 2 degrees meaning a 90% cut by 2050 in developed nations, the locked in temperature increases would result in adaptation assets appearing in the portfolios of every pension, super, insurance and sovereign wealth fund in the world. Many stakeholder communities have been analysing the best way to ensure that capital markets align with mankind’s best interests. These interests are perceived to be stability and sustainable growth – stability to survive the increasing frequency of so called black-swan events and sustainable growth to ensure that any short term growth doesn’t have to be paid for by future generations. New age sustainable capitalism is being pushed conceptually into every financial regulatory and investment debate in addition to the moral, ethical and environmental ones that have been going on for years.

However these debates play out and whatever pressures are exerted on asset owners, banks, other institutions to build a more sustainable economy, the fact of the matter is that asset owners will be faced with climate change issues, risks and opportunities for at least another one hundred years.

Even if tomorrow, a global accord was struck to radically reduce emissions to keep us to 2 degrees meaning a 90% cut by 2050 in developed nations, the locked in temperature increases would result in adaptation assets appearing in the portfolios of every pension, super, insurance and sovereign wealth fund in the world. The change in the energy economy alone will have ramifications for that period of time as the initial renewable energy assets are installed in such a hurry to avert a climate catastrophe themselves requires early replacement.

Given the capital intensive nature of high emitting assets, the finance community will play a crucial role in assessing the optimum path to replace trillions of dollars of high emitting assets with low emitting assets. From the top to the bottom of the investment chain, climate change capability will be perhaps the most important skill a stakeholder possesses and understanding which asset owners do it well and which do it poorly will be critical for millions of retirees whose savings will depend on that capability.

This will be especially true for climate change as the pressure on trustees to avoid herd mentality in seeking returns is growing and the historical mistake by many asset owners of following each others errors is being increasingly questioned. In terms of asset classes, clearly infrastructure and private equity stand to benefit greatly from this transition. With unique collaborations on direct investment into very large scale infrastructure, and the polarisation phase of asset owners who integrate environmental, social and governance (ESG) issues into their investment practices and those who don’t, the uniqueness of each asset owners portfolio will increase – a possible widening of the spread of the index.

In this unique mega trend lies both great risk and opportunity.

For asset owners, business as usual is no longer an option – the leading peers are already changing radically and some of them are planning to accelerate this change through every aspect of their business. This change will impact the 5 major areas of transparency, risk management, low carbon investment, active ownership and re-alignment of the investment chain.

The Asset Owners Disclosure Project believes that asset owners who embrace this change will, in a reasonable time frame, begin to attract new members and retain old ones.

But embracing change is not easy. In practice, embracing change has never been easy despite the intellectual encouragement of the academics and consultants. Change is disruptive; change can be painful, change means organisational risk. However, difficult though this change will be, the price of not embracing it is high indeed. The tide for member education is unstoppable and these members will add to the industry, regulatory, media and civil society pressure for change. Once a gap between leaders and laggards is made clear the need for more radical change will result in new risks that may already have shown themselves as problems in the portfolio.

The Asset Owners Disclosure Project is committed to independently measuring and reporting this change and to providing resources, to asset owners to help them embark on this journey and guide them through the best practice maze whilst informing the market of news and developments in the industry relating to climate policy, regulatory trends and market analysis. It is said that invention is the mother of necessity – the climate change era is critical to the future of the world and many of its people and stakeholders. There can be fewer more important stakeholders than the world’s underlying asset owners. The urgent necessity is for this community to have access to an independent, credible organisation with a proven methodology to provide all other stakeholders with accurate, relevant, insightful, detailed and honest information.

The Asset Owners Disclosure Project arrives not backed by guesswork but is supported by three years of an Australian pilot and several large fund best practice projects which have given it the knowledge and experience it needs to succeed. As it adds the stakeholder blend of a high profile board, key partners and not least some governments who need to understand how best to drive early investment and thus make policy setting a whole lot easier. Ultimately the real necessity is for asset owners to begin truly driving a smooth transition to the low carbon economy – it is their time and they will need to wrestle back control from managers and consultant and drive politicians to facilitate returns in their new investments. That necessity requires both bravery and invention.

Our vision is for Asset Owners Disclosure Project to be recognised as one of the most important responsible investment initiatives in the world and to provide stakeholders of all kinds with the data and analysis they need to play their part in the low carbon transition.

We kindly invite asset owners to disclose their position.

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