Australia’s regulators all agree that climate change poses a real risk to the economy. As governments around the world declare a climate emergency, here’s how advisers can help safeguard their clients’ wealth from climate risk.
The environmental risks of climate change are well documented. In the long term we can expect more extreme weather events, rising sea levels, more climate refugees and greater food security risks.
Evidence is also mounting about the financial risks of climate change. In March 2019 the Reserve Bank’s Deputy Governor, Guy Debelle, delivered a speech outlining the damaging impact that climate change could have on Australia’s financial stability.
Meanwhile, the prudential regulator APRA is pushing financial companies to run climate-risk tests on potential investments. And ASIC commissioner John Price has confirmed the corporate regulator will be treating climate risk as a key governance and disclosure priority. A mechanism to price carbon seems inevitable – and when it becomes a reality, fossil fuels could become stranded assets.
At the time of writing, a university graduate, Mark McVeigh, is suing his super fund, REST, alleging that the information they provided about their management of climate-related risks didn’t meet their disclosure requirements and due diligence risk duties. While REST has published a Climate Change Position Statement, the case continues, with REST and Mark to provide all their evidence by August 2019, and then return to court for another hearing.
If Mark wins his case, this could compel investment managers to review the way they invest when it comes to climate change. It’s clear that they can’t be passive when it comes to major or material risks. So ignoring climate risk could leave more investment managers open to future legal liabilities. What’s more, by continuing to put their money into fossil fuels, they’re missing out on the opportunities offered by the fast-growing renewables sector.
Declaring an emergency
On 1 May 2019, the UK parliament made history by declaring an environment and climate emergency. This was followed shortly afterwards by the Irish government’s declaration of a climate and biodiversity emergency. Locally, the ACT government has followed suit with its own climate emergency declaration. Yet, despite this level of urgency, Australia still lags the world regarding effective action to mitigate climate change.
There’s compelling evidence that unless the entire globe acts on climate change now, we’re heading for catastrophe. To lessen the impact, the Intergovernmental Panel on Climate Change (IPCC) report says we must not exceed a global temperature increase of 1.5 degrees Celsius above pre-industrial levels. To reach this goal, we need to eliminate the burning of fossil fuels.
A 2018 survey by The Australia Institute found 73% of Australians are concerned about climate change and 70% want the government to replace old coal plants with clean energy. What’s more, as signatories to the 2015 Paris Agreement, Australia has committed to act to limit global warming to below dangerous levels.
To meet our obligations, the Climate Council estimates we’ll need to leave 90% of our coal reserves unmined. At this point in time, our economy and energy production still rely largely on fossil fuels – and both individual and institutional investors continue to invest heavily in the old economy (namely, coal and oil) ignoring the financial risks of this strategy
So how can you, as an adviser, help your clients invest in a way that avoids the financial implications of climate risk and benefits from the solutions?
Avoiding risk and doing good
By seeking out environmentally responsible investments you can help your clients avoid the growing financial risks of climate change.
At Australian Ethical, we do not invest in coal or oil. Instead, we actively work to create a renewable future for Australia, investing in solar, wind, tidal, geothermal, and hydro renewable energy companies.
We understand that tackling climate change goes way beyond fossil fuels. That’s why we invest in companies and sectors that help decarbonise our economy – from food production and transport, to recycling and waste management.
We exclude all companies whose main business is fossil fuels, as well as diversified companies that earn some fossil fuel revenue and aren’t creating a positive impact with their other activities. We also measure the impact of our investments and are transparent about the results. In 2018 we used analytic tools from the European 2° Investing Initiative (‘2ii’) which found we have six times more investment in renewable power generation proportionally than the global sharemarket. The results of the 2ii analysis, which are discussed in our 2018 Sustainability Report, also found our portfolio is aligned with what is required to keep warming below 2°C.
Starting a conversation about climate risk
As an adviser, you play a key role in helping your clients invest in line with their values, while protecting their wealth from climate risk. You can also help them understand and make informed decisions about renewable investments.
So why not start a conversation with your clients today about investing for their financial future as well as the future of the planet? To help kick-start your discussion, check out our carbon risk calculator which shows how investing in renewables could dramatically reduce their annual carbon footprint.
Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949). This information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the financial services guide (FSG) and relevant product disclosure statement (PDS) available at australianethical.com.au.