However, the costs associated with climate change are expected to rise to more than $4 trillion by 2030, according to the institute.

But what is the link between superannuation and climate change? 

Cause for concern

On December 11, The Climate Institute, a global non-government organisation (NGO), released its inaugural report, Climate Smart Super: Understanding Superannuation & Climate Risk, which offered information for individuals about how they can actively engage with their super funds around the investments made on their behalf.

“I think the last 12 months have been the start of a tipping point in terms of both the mainstreaming of concepts like stranded assets and unburnable carbon but also in the emergence of outlets for active funds membership,” The Climate Institute's chief executive, John Connor, told InvestorWeekly.

“We have seen the AODP [Asset Owners Disclosure Project] build ‘The Vital Few’ platform, which is a facilitated conversation with trustees,” Mr Connor said.

“Many NGOs are either beginning or about to begin in this space.”

The Vital Few is a community of ‘citizen investors’ who are being inspired to speak up and take action to ensure the investments made on their behalf are more sustainable, according to the group’s website. 

It is operated by the AODP, which released its climate index rankings of the world’s 1,000 largest asset owners as part of The Climate Institute report. 

The AODP survey found that less than two per cent of the $30 trillion currently held by retirement savings funds globally is invested in low carbon technologies and other climate change solutions.

Twenty-four asset owners submitted direct disclosures in response to the survey, an increase in the response rate of 41 per cent compared with last year.

“When I looked at the numbers, originally we started focusing on the top 1,000 super funds, pension funds, insurance companies, sovereign wealth funds and endowment funds,” AODP chair and former Liberal Party leader Dr John Hewson said.

“They control about US$70 trillion worth of assets and own more than 50 per cent of all the listed companies on all the stock exchanges in the world,” Dr Hewson said. 

“About 55 to 60 per cent of those assets [are] carbon-exposed investments, but only two per cent [are] low carbon,” he said.

“That’s staggering. That is a massive risk in itself. Then, when you’ve got a fair bit of pushback and denial and resistance and so on, I find that quite frustrating.”

 Source: The Climate Institute

Motives for action

There are essentially two arguments for reducing exposure to carbon intensive investments: moral and economic. 

Responsible investing is nothing new, with fund managers such as Hunter Hall building their businesses around ethical principles. 

What is only just now appearing, and gaining momentum, is the economic argument, said Hunter Hall chief executive David Deverall.

“We are now seeing superannuation funds like LGS [Local Government Super] coming up with a lot of economic arguments as to why you would not want to invest in certain sectors and industries,” Mr Deverall said. 

“The whole climate side of things is really hot at the moment,” he said, “and the argument is don’t invest in fossil fuels because the assets on the balance sheets of these organisations are possibly worth a fraction of what they are today – at least from an accounting point of view – and they could be faced with multibillion dollar losses on balance sheets and a huge destruction of value.”

Hunter Hall has been a responsible investor for the past 20 years, using negative screens to weed out sectors related to armaments, gambling, animal cruelty and tobacco.

“Of course, we then had to prove we could have this negative ethical screen and still perform very well in our fund,” said Mr Deverall.

“We are the best performing fund manager over the last 18 years, since the inception of the fund, so we’ve been able to prove to our investors that you can not only do the right thing but also make a lot of money for your clients.

And that’s the handle – doing the right thing while still making money.

The economic test

This is a challenge faced by all superfunds that have embraced green investing.

LGS – which achieved the top AODP climate index ranking for the second consecutive year – understands that growing the wealth of its members is still priority number one.

It is not simply a case of making a moral decision, LGS chief executive Peter Lambert told InvestorWeekly.

“It has to actually pass an economic test as well,” Mr Lambert said. “We track the economic performance of the decisions we make and if, over a reasonable period, we find that it was costing us returns, we really have to consider whether or not we are doing the right thing by our members.

“We like to think that it’s not mutually exclusive, that you can adopt a sustainable policy and not cost your members' returns.”

“Let’s say there are companies that you believe have a poor [environmental, social and governance] ranking and you exclude them from your stock because of that. You’ve got to give that a reasonable period to see whether that exclusion is the right decision because generally the exclusion is on the basis of a long-term risk that we see,” he said.

“You need to allow it to play itself out, but if it doesn’t, then you need to reconsider whether that risk you see is there or not.”

Need for transparency

LGS is a good example of a super fund doing the right thing, but it is also an anomaly.

This year, four out of the top 10 AODP super funds were Australian. 

The survey’s ranking mechanism gave extra credit for disclosure in a two-pronged attack on global asset owners, embarrassing them by ranking them anyway and increasing the pressure for transparency in a typically opaque industry.

Mr Hewson and Mr Conner are even threatening to name and shame super funds that fail to ‘walk the talk’ on climate risk transparency with a hypocrisy index.

“The hypocrisy is [that] when they are investing in companies they are often quite demanding in terms of what those companies are doing in terms of their exposure to climate risk, yet they are not prepared to have the same level of transparency imposed on themselves and I think that is an attempt to defend the indefensible,” Mr Hewson said.

“In time, it becomes impossible to do that and so there are a number of ways – top-down and bottom-up.”

Mr Hewson envisages a future where investment will be less about index hugging and more about making a slightly better return, championing the economic argument for low carbon investments. 

There is growing momentum at a grassroots level of superfund members wanting to know what they are indirectly invested in which, along with campaigns, is driving change from the bottom up.

This is a long-term proposition that is still in its infancy, albeit one that is picking up speed.

“The reality is that this is probably the newest area of excluding carbon,” LGS chief Peter Lambert said.

“It has been difficult to track performance because there hasn’t been a real index that looks at what the alternatives, the low carbon emitting companies, are,” Mr Lambert said.

“It’s still early days.”

New disclosure obligations

As part of the federal government's 'Stronger Super' package of reforms, new portfolio holdings disclosure obligations will be imposed on trustees of registrable superannuation entities (RSEs).

This helps somewhat, but is really a drop in the bucket compared to what organisations like The Climate Institute are trying to achieve. 

“What we are looking for is more,” The Climate Institute’s John Connor said. “We are looking for measurements of broader emissions content, so portfolio disclosure is still not adequate in our view.

“My understanding of those reforms is you don’t get a full sense of exact investments but you do get to know who’s there,” he said, “and that’s an improvement.”