Edition: Sep - Nov 2014


Lip service on climate change

Pension funds should be much more assertive on carbon emissions in their investment strategies, urges John Oliphant*, being sensitive to their impact on returns, beneficiaries and society as a whole.

Oliphant...shared responsibility

Too many things are happening around us that are wrong. Yet sometimes we shy from our power to make things right.

Earlier this year SA endured rainfalls that were record-breaking and unseasonal. Economic costs of the floods were estimated at hundreds of millions of rand. Many families were displaced and some lost loved ones.

It is normal that, once in a while, a country experiences extreme weather-related events. But in recent years these events have become increasingly frequent. This suggests that what prominent scientists had predicted -- rising global temperatures due to anthropogenic activity -- is starting to become a reality. They anticipated the consequence that rising temperatures would lead to increased intensity and frequency of extreme weather-related events, for SA as everywhere else.

Coincidentally, we experienced these events during the 20th anniversary of the UN Framework Convention on Climate Change. Although much progress has been made under the UNFCCC to develop frameworks that can assist the global economy in the transition from being carbon-intensive to low-carbon, there is a lack of practical commitment.

We know that the earth’s surface has warmed by 0,85 degrees Celsius over the period 1880-2012. This is mainly attributed to increased concentration carbon dioxide and other greenhouse gases due to human activity. Its reversal ought to be everyone’s responsibility, to meet our needs today without impacting negatively on the ability of future generations to meet their needs.

Pension funds can play a meaningful role in the fight against climate change because much is at stake for long-term investors. Recent research by UNEP-FI estimates the annual environmental costs from worldwide human activity to be about $6,6 trillion, equating to approximately 10% of global gdp. More than 50% of company earnings could be at risk from environmental costs in an equity portfolio weighted according to the MSCI All-Country World Index.

Given their typically diversified portfolios of investments, pension funds are long-term universal owners of companies. The ‘universal owner’ concept is that there are clear links between the performance of diversified investment portfolios and the economy overall.

As such, the sum of the parts of the portfolio equates broadly to a share of the country’s economy measured in gdp terms. This then suggests that long-term costs of climate change will somehow be carried by long-term investors in the form of reduced returns from investee companies as result of such impacts as increased taxes, insurance premiums and the physical costs of disasters. It is therefore in the long-term interest of pension funds to take into account environmental issues in their long-term investment strategies.

In fact, pension-fund trustees are obliged to consider environmental, social and governance (ESG) issues for incorporation into their strategies. This is captured in the preamble to Regulation 28, amended in 2011 specifically to include the ESG requirement.

The UNEP-FI report summarises some practical steps that could be pursued by institutional investors like pension funds to mitigate or better manage risks associated with the environment. Trustees through their agents should, for example:

  • Evaluate impacts and dependence of investee companies on natural resources;
  • Incorporate information on environmental costs and risks into engagement and voting initiatives with a view to reduce environmental impacts of portfolio companies;
  • Encourage rating agencies, analysts and fund managers to incorporate environmental costs into their analyses.

Trustees’ lack of action and sense of urgency could amount to a breach of their fiduciary responsibility towards funds, as they will appear to be encouraging irresponsible investing. Investment is irresponsible when it imposes costs on others today or in the future, and these costs are neither priced in the market nor considered in the investment decision.

As such, trustees have the obligation to consider all factors that could impact materially on the sustainability of their funds’ investments in the long term. Climate change is likely to be an important factor. Ignoring it will not make it disappear.

* Oliphant is principal executive officer of the GEPF, chair of the Code for Responsible Investing in SA (CRISA), and a council member of Principles for Responsible Investing (a global private-sector initiative in partnership with the United Nations). He was named Africa’s top emerging leader by Africa Investor in 2013 and Financial Services Person of the Year by the Principal Officers Association in 2012. He writes in his personal capacity.