The growth of superannuation funds over recent years to become the largest pool of capital has made them a target for solving many of the country’s problems or areas of under investment.

The call to raid our retirement savings comes from an increasingly large number of vested interests including governments, the private sector and social stakeholders such as the unions. The recent excellent report from the OECD regarding the role of institutional investors to drive investment in one of those areas – the low carbon economy – shows why climate change is such a unique challenge for superfunds and why the funds, their investor groups and governments are still only in the tinkering stage of driving a satisfactory response to this challenge.

What the OECD report omits however is the obligations of trustees to manage systemic risks (q.v. Baker & McKenzies’ report on fiduciary duty and climate change) and to be transparent about their strategies for doing so.

The OECD report cites the view held by many funds that there is indeed a lack of investments at the correct balance points of risk and return.

The real problem however is the total unwillingness or inability of asset owners to price the risk correctly and to understand that an investment level risk needs to be considered in tandem with market and portfolio risk.

Asset owners who give their fund managers the same energy risk-return hurdles for low carbon assets as they do for high carbon assets simply do not understand the issue.

These investments are often twenty-five year assets, some longer.  Once you analyse the landscape there are six main paths to a low carbon economy  – US politics, Chinese politics, regional scheme convergence, innovation, investor reallocation and physical impacts – and if there is even a reasonable chance that any one of them were to transpire, then the high carbon assets in a portfolio will be rapidly repriced.

In this event there will be no trading out and no escape – just like sub-prime. The funds have therefore priced the low carbon assets based on short-term risk-return hurdles and thus fail to create a long-term risk position around carbon.

Some savvy asset owners are beginning to agree that in the event that the 55 per cent or so of their portfolios invested in high carbon assets is rapidly repriced anytime in the next 10-15 years, then only a thematic climate allocation, for example of 5 per cent, will provide a suitable hedging strategy.

Such an allocation across the Australian industry would yield $65 billion from a $1.3 trillion industry if accepted broadly.

Asset owners doing proper analysis will create their own view of a climate and carbon trajectory and use it to guide the investment risk-return hurdles. My guess is that, in the absence of any insightful advice from their consultants on the issue, that they are afraid to lead and so we have structural and cultural deadlock.

The consultant’s advice should be that hedging strategies are not free, they cost return, and so if pension and superannuation funds wish to avoid a repeat of the sub-prime crisis, they need to don their systemic hats and start writing a few low carbon cheques.

This isn’t about conducting a raid on funds for a cause; this is about the need to urgently correct a major portfolio imbalance that will likely impact every beneficiary on the planet.