Alexander Forbes: Climate change and pension funds

Written by: Alexander Forbes Posted: 13/12/2019

ADV_AlexanderForbesThree degrees of warming would cause negative returns for almost every sector, including financials, agriculture, industrials and consumer staples

A publication by Alexander Forbes’ global strategic partner, Mercer, has revealed the stark realities of the impact of climate change on the planet, with devastating consequences on everything from daily lives, to agricultural production and water resources.

Investing in a Time of Climate Change – The Sequel 2019 represents three climate change scenarios: a 2°C, 3°C and 4°C average warming increase on pre-industrial levels. 

According to the report, a 2°C rise in temperature would result in significant losses between now and 2030 in coal, oil and gas, which would result in opportunities for higher returns on renewable energy investments.

Premal Ranchod, Manager Research Analyst and ESG (environmental, social and governance) champion at Alexander Forbes Investments, contextualises these facts. “If a child with a 2°C rise in temperature is fever-struck, imagine how an unabated temperature rise affects the planet, including its fauna and flora. 

“Extreme weather patterns affect agriculture production and water resources, ultimately affecting the sustainability of society and the environment. It’s just a matter of time until these tangible effects begin to influence asset classes and therefore investment returns.” 

Three degrees of warming would cause negative returns for almost every sector, including financials, agriculture, industrials and consumer staples. The damage would be irreversible should we continue ignoring the signs up to 2030.

“The current trajectory could put us beyond a temperature that humans have ever experienced, some time in the next 30 years,” says Ranchod. “The last time the global mean surface temperature was comparable to today was more than 100,000 years ago. The last time CO2 concentrations were as high as today (over 400 parts per million) was three to four million years ago. 

“And the last time the world was 4ºC warmer was more than 10 million years ago,” he adds. “It’s possible that we could reach 4ºC of warming by the end of the century. Humans have never existed in a warmer time.”

According to the Initial Report on Tackling the Climate Emergency, published in July 2019 by the Government of Jersey, ‘there exists a climate emergency likely to have profound effects in Jersey’. 

The report focuses on Jersey’s aim to be carbon-neutral by 2030 by putting in place ‘more ambitious policies to accelerate carbon reduction’. The financial services industry, too, will be considering the potential impact on the investments and pensions of clients.

In South Africa, the Pension Funds and Climate Risk report by activist organisations Just Share and Client Earth, and accompanying legal opinion from law firm Fasken, requires South African pension fund boards to consider climate change risks in their investment decisions. 

A failure to consider material risks arising from climate change would likely amount to a breach of fiduciary duty by the board of a pension fund, under both South African regulatory frameworks and common law principles. 

Although not binding and ruling, Ranchod acknowledges the spirit of the report and opinion, in addition to the conversations that it has prompted across the industry.

It is more than likely these discussions will be occurring in Jersey boardrooms as trustees and employers identify and try to mitigate the risks involved around climate change for investors and pensioners.

He recommends that funds practically begin managing these risks by considering the following: 
Beliefs – ESG policy – process – portfolio A fund should define its investment beliefs, which should be articulated in a policy. The portfolio should be managed and reviewed in accordance with the policy.
Be an active steward (active ownership and voting practices) Use influence as shareholders to positively affect a company’s conduct through engagement and proxy voting, and disclose the voting outcomes and reasons for supporting or going against matters.
Allocate to thematic investment Invest in assets specifically related to sustainability. Also, ensure that there is a reporting framework in place that assists in monitoring and measuring the real impact these investments are having. 
Use positive and negative screening Include or exclude companies from share selection according to climate change criteria. 
Disclose carbon exposures and carbon tax valuation Ensure that listed companies disclose their carbon exposures and taxes. The users of financial statements should integrate these financial measures in their assessment of the value they attribute to the companies.

“The global pension fund industry and average fund member are probably under-equipped to attend to these risks,” concludes Ranchod. “However, attempting to be proactive around climate change is helpful to long-term fund solvency and is encouraged by the regulatory environment. Being conscious of where the pounds and pence of pension funds are ultimately going will encourage more sustainable allocation of assets.” 

FIND OUT MORE

For further information, please contact:

• Adrian Peacock, Managing Director, Alexander Forbes Channel Islands E: peacocka@aforbes.co.je  T: +44 1534 837837

• Sarah Jouhal, Director Wealth Management E: jouhals@aforbes.co.je  T: +44 1534 837837

Alexander Forbes Channel Islands Limited (AFCI), registered company number 9596, trading as Alexander Forbes Offshore (AFO), is based in Jersey and is 100% owned by Alexander Forbes Group South Africa. We have been the Jersey presence for Channel Islands employers and employees since 1975 and AFCI is regulated by the Jersey Financial Services Commission. 

• This advertising feature was first published in the November 2019-January 2020 edition of Businesslife magazine


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