The drag on economic growth associated with climate change will wipe 0.25 per cent a year from superannuation returns for the foreseeable future, according to the asset consultants at Frontier Advisors.
Frontier, whose core clients are industry funds, is convinced that even under the most optimistic scenarios, climate change will weigh on economic growth and therefore investment returns.
“We
have lowered the likely returns we believe investors can expect, across
all asset classes, by 0.25 per cent a year," principal consultant
Philip Naylor said.
“The primary driver of this downward revision has been the long-term impact on the global economy of climate change.
"What we're saying to trustees is that if in the past you've been aiming for a 7 per cent return, for example, you should expect the same portfolio will only deliver at 6.75 per cent return."
Frontier provides investment advice and research to clients that collectively have $380 billion in funds under management.
One response from those funds to the lower assumed return might be to increase their exposure to riskier or illiquid assets to make up for the expected shortfall.
But they might also choose to accept the drop and convey that message to regulators and members.
Assets can be directly damaged by flood, drought and severe storms, but portfolios can also be harmed indirectly, through weaker growth and lower returns.
Frontier's modelling takes into account the cost of damage associated with climate change – such as more frequent and destructive weather events – and the cost of mitigation, meaning the cost of trying to limit the magnitude of global warming and its related effects.
"We’re saying to our clients: you can lock in a loss of 25 basis points as best case," Mr Naylor said.
The modelling assumes that governments will implement already agreed measures to address climate change such as the Paris Agreement − the global pact to keep temperature increases this century below 2 degrees above pre-industrial levels.
Frontier modelled the net impact of climate change on investment returns across different policy paths to the end of the century.
Frontier, which is owned by AustralianSuper, Cbus, HESTA and First Super, will this week tell its clients about the cut in its assumed risk-free rate.
The risk-free rate is the likely return on a safe investment, typically a government bond, and is used to compare returns with riskier investment options.
Frontier conducts annual reviews of long-term investment themes but adjustments to its risk-free rate are infrequent.
The last revision occurred in 2015, when the rate was cut largely due to the likely effects of demographic change, including lower birth rates and ageing populations in some parts of the world.
Links
- Super funds risk lawsuits for ignoring climate threat
- Big Money Starts To Dump Stocks That Pose Climate Risks
- Businesses That Ignore Climate Change Could Face 'Kodak Moment', Warns APRA
- Trump Official Goes Rogue, Says Climate Change May Cause Next Financial Crisis
- Norway's $US1 Trillion Sovereign Wealth Fund To Dump Billions In Coal Investments
- Climate Change Poses A Clear Financial Risk To Australia
- Heavyweights Now Speaking With One Voice On Climate Change Risks
- Why Climate Change Risks Are 'Material' For Big Finance
- APRA Demands Banks, Insurers Act On Climate Risk
- The RBA Has Sounded The Climate Change Alarm. Time To Sit Up And Take Notice
- 'Change Now Or Pay Later': RBA's Stark Warning On Climate Change
- Financial Giants Can Have A Pivotal Role For Climate Stability
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