Managing climate risk

November 2017

As a long-term investor, managing the risks of major stress events is something we take seriously—especially climate risk and adaption.

Here are our most recent findings on the carbon exposure and physical risks of climate change to our portfolio.

Carbon exposure

Our domestic share portfolio is ‘underweight’ in carbon. This means our exposure to Australia’s most carbon-intensive companies is considerably lower than the part these companies make up in the Australian share market. The same is also true of our international share portfolio.

This is because we prefer quality companies offering stable revenues and lower share price volatility, especially for the Defined Benefit Division (DBD). It means we tend to avoid companies involved in the resources, energy and mining sectors.

As an active investor, we also have control over, and visibility of, the companies we invest in. We take a comprehensive view of all the factors that impact the value of companies, including environmental, social and governance (ESG) risks and opportunities. 

We also directly engage with companies on climate and other environmental risks to improve our understanding of the issues—and seek to use our influence to ensure these risks are being appropriately managed.

Source: BNP Paribas

Regulatory risk

Carbon pricing in Australia has a chequered past. And more recently abroad, United States President Trump has signalled a retreat from the 2015 Paris Climate Agreement. He’s also watered down environmental regulations, including paring back powers of the Environmental Protection Agency (EPA).

Carbon trading schemes in Europe, China, California and elsewhere however, reveal that there may be an appetite for more expansive global policies.

In light of regulatory carbon policy risk, Credit Suisse analysis suggests infrastructure and commercial property assets are likely to be among the most resilient sectors, and energy and resources sectors among the least resilient.

We hold many of Australia’s largest infrastructure and commercial property assets as part of our major share holdings. We also have relatively low exposures to high carbon-intensive energy and resources sectors. Together, this diminishes potentially significant regulatory risk to our portfolio.

Weathering the storm

The Intergovernmental Panel on Climate Change (IPCC) forecasts the potential for an increase in the severity and frequency of severe weather events because of climate change. On that basis, we’ve assessed these physical impacts to understand—to the best of our ability—how our portfolio could be impacted.

We found we have relatively low investment exposure to the locations where severe weather event risk is expected to have a greater impact on Gross Domestic Product (GDP)—typically emerging markets. On a geographical basis, we estimate 2.7% of our Balanced option could be at risk due to severe weather events, and 2.2% for the DBD portfolio.

A rising tide lifting all boats

Modelling from the IPCC suggests a potential rise in sea levels of approximately 74cm by 2100 in the event of a ‘business as usual’ global response to climate change. We’ve assessed our portfolio with this in mind and our findings were largely positive.

For example, the four large airports we’ve invested in (Sydney, Adelaide, Brisbane and Auckland) have all undertaken significant climate resilience adaptation studies and prepared actionable plans. They include ongoing strategic development activities, and analysis of the costs of mitigating operational disruptions from worst-case climate scenario events.

We’ll continue to evaluate climate risks across our whole portfolio in line with up-to-date research on a rolling basis, while maintaining regular engagement and dialogue with our major investments.