Issue: March 2013 / May 2013 Issue
Water scarcity poses potential investment risk for pension funds
Given that the Government Employees Pension Fund (GEPF) invests 90% of its portfolio within SA, it is important for us to understand water scarcity as a potential investment risk to our portfolio returns. Institutional investors - such as GEPF - play an important role in shaping this transformation towards a greener and more sustainable economy; one that is resource-efficient, lower in carbon emissions, resilient and equitable.
GEPF principal officer John Oliphant has made it clear: “The era of profits and more profits at the expense of the environment and society is a distant memory. Responsible investing is now an integral part of any long-term investing.”
Climate change and water scarcity were flagged as a risk (and an investment opportunity) that would have a significant impact on GEPF’s portfolio over the long term.
The WWF report calculated the “external price of water scarcity”. It found that the annual external value of water used by operations and first-tier suppliers of JSE top 100 companies could total more than R56bn (US$6,78bn). In essence, they are paying “less than 1% of the true value of water”. The potential risks to companies from disruption, higher water tariffs and “rising input prices due to water stress will negatively impact companies’ financial results, operations and, ultimately, valuations”.
Institutional investors are failing to factor in climate change and
freshwater risks when making investment decisions, said the
WWF. This posed a risk in that the listed bonds and equities of
The Asset Owners Disclosure Project (AODP) revealed that a typical fund has 55% of its assets in high-carbon investments and only 2% in low-carbon. The carbon footprint of aggregated holdings in GEPF equity portfolios invested in SA was valued at 72 tonnes of carbon per Rmn value. This was 9% lower than the average carbon footprint of the FTSE/JSE Top 100 companies.
GEPF, as a defined benefit pension fund, is by nature a long-term investor. We believe that GEPF’s integration of environmental, social and governance issues across our portfolio – and the allocation of 5% of our portfolio to investments of a developmental nature – will produce sustainable and suitable returns relative to the actuarial liabilities of the Fund.