Climate risk, the risk of catastrophic weather events, is very real, and the challenge of dealing with it appropriately is already very urgent.
The science is in. The magnitude and urgency of the challenge has been clearly established by a most unusual event. Some 95 per cent of a peer group assessed by climate scientists have actually done what they usually don't do, namely agree.
It is in the nature of science and scientific method, to disagree- to contest each other's hypotheses and research conclusions. None of us non-scientists would have ever known about the problem if this group of scientists hadn't gotten together to identify and measure the challenge.
From an economic point of view, climate risk needs to be priced correctly. We know it is not being priced rationally, indeed we know governments are "under-pricing" it, or subsidizing it. When it is not priced correctly resources get wasted, by creating unnecessary costs and risks for future generations.
While various governments around the globe are dickering with various attempts "to put a price on carbon", directly or indirectly, a group of us have recently launched an exercise we call the Asset Owners Disclosure Project, which attempts to come at the issue another way- from the point of view of investment.
AODP is approaching the issue of investment from both the "top down", and from the "bottom up".
From the "top down", AODP is surveying the top 1000 pension, superannuation, insurance companies, and sovereign wealth funds on how they are attempting to manage climate risk, and on the "carbon intensity" of their investments.
These asset owners are the real financial powerbrokers, managing the largest pool of money in the world, some US$60 trillion, owning more than half of all stock exchange listed companies globally.
However, they invest some 55 per cent of this money in carbon intensive industries, and only a mere 2 per cent in alternative energy/alternative technology industries, the latter being the "new industries" that will represent the technological revolution that should characterise an appropriate response to climate change.
The AODP strategy is to be the only, truly independent, fully transparent, rating agency on the management of climate risk. Our belief is that by rating and ranking these top 1000 asset owners we will, in time, "force" them to increase their low carbon investments.
If we could raise this to 5-6 per cent of their funds, we would probably have created enough new investment money to provide an adequate response to climate change.
It should be clear that, in the absence of derivative and other markets, the most effective way for these asset owners to "lay off" climate risk, is by shifting part of their portfolio from high to low carbon intensive industries.
Perhaps not surprisingly, we have already experienced some push back from the major investor groups claiming to represent these asset owners (although their coverage is only about 25 per cent). We had sought their co-operation with our survey. But they preferred to persist with their-own, lesser approach - something of a smokescreen claiming transparency, but stopping well short of adequate/full transparency.
In our view, time will soon run out on this attempt to defend the indefensible!
To shorten this time, our "bottom up" approach is an attempt to empower the fund members/beneficiaries, by launching the first such social media platform, The Vital Few, to facilitate them in writing to their fund trustees/directors seeking information on the management of climate risk and the carbon intensity of the funds' investments.
This could prove to be a most "embarrassing" experience for the asset owners, and should be sure to elicit a substantive response, if fiduciary duties are taken seriously. It probably won't take many "letters' to start the influence, which is why the "few" are so "vital". A few pension members can achieve real change.
We plan to release our first survey results, ratings and rankings in November.
Watch this space!
Column by Dr John Hewson
