Political leaders are beginning to take steps to move climate change up their agenda. It’s a good time for pension funds to do likewise, writes Louise Rouse

A joint statement from the UK and China on Tuesday to co-operate in tackling climate change and in supporting ‘efforts to bring about low carbon transitions’ in each country is the latest signal that hard hitting regulatory measures to reduce carbon emissions will be introduced in the coming years.

Earlier this month America’s Environmental Protection Agency unveiled its Clean Power Plan, the cornerstone of President Obama’s climate change agenda, which pledges to cut emissions by 30% below 2005 levels by 2030 which would completely transform the US’s power sector.

Regulatory efforts to tackle climate change should be welcomed and indeed championed by pension funds.

As ‘universal investors’ with interests across the economy pension funds have a financial interest in avoiding climate change which could jeopardise entire portfolios vulnerable to its economic impacts. The impacts of climate change on pension fund portfolios are likely to far outweigh any short-term benefits to fossil fuel companies and other high carbon industries from the continuation of business as usual.

Fossil fuel companies could suffer a significant loss in value as their assets become impaired or stranded

However, pension funds heavily exposed to high carbon assets need to assess and address the risks from increased regulation aimed at curbing carbon emissions. In the case of effective regulation to tackle climate change, fossil fuel companies could suffer a significant loss in value as their assets become impaired or ‘stranded’.

Share prices in US coal producers Arch Coal, Peabody Energy and Alpha Natural Resources fell after the EPA announcement.

In light of these significant recent political announcements, it’s prudent for trustees to assess the fund’s exposure to this ‘carbon risk’ or ‘stranded assets risk’ and to take steps to address it.

In its 2013 report for pension funds, “The Green Light Report: resilient portfolios in an uncertain world”, ShareAction makes recommendations for pension funds to help them understand and limit their exposure to climate risks. It has also facilitated expert training for over 40 trustees on the issue.

Conducting a portfolio carbon footprint can help investors to identify where carbon risk is concentrated

Conducting a portfolio carbon footprint can help investors to identify where carbon risk is concentrated. It should be used as a tool to inform trustees’ judgements about climate risks rather than to determine actions merely to reduce reported portfolio emissions.  

Reducing exposure to assets vulnerable to carbon emission regulations can be done through engagement and or stock selection, and across asset classes. Pension fund trustees should support calls for fossil fuel companies to reduce capital expenditure on high cost/low return projects in favour of returning money to shareholders or re-allocation to less risk projects. 

Other sectors exposed to carbon risk include basic resources (including mining), construction and materials, and the food and beverage sectors.

Pension funds with active mandates can ask managers to integrate carbon risk into stock selection

Pension funds with active mandates can ask managers to integrate carbon risk into stock selection; those with passive mandates can reduce risk by switching to carbon tilted tracker funds. Pension funds should also consider supporting engagement initiatives like CDP’s Carbon Action and CCLA’s Aiming for A which encourage companies to reduce carbon risk.

Political leaders are beginning to take steps to move climate change up their agenda. It’s a good time for pension funds to do likewise.

For more information go to http://www.shareaction.org/greenlightcampaign

Louise Rouse is director of engagement at ShareAction

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