Are you prepared for the long-term risks of climate change?
As a financial adviser, I’ve noticed more and more clients come to me with concerns about climate change, asking if there’s anything they can do. Most are looking to avoid investing in fossil fuels, and make sure their retirement savings will be protected. An important discussion I have with clients involves superannuation, and what risks around climate change might be lurking in there. Reducing climate change risk means considering the sustainability of your investments over the long-term.
The trustee of your super fund is required by law to act with care, skill and diligence and in the best interests of all members. Acting in your ‘best interests’ is generally taken to mean financial interests, but the super industry is becoming aware that climate change risks are fast being considered material and financial.
In fact, you’ll be surprised to learn that a $57 billion super fund recently faced litigation for not taking climate change risk into account sufficiently… and they conceded.
No judgement was made in the case because they settled out of court, but after a two year legal argument the super fund acknowledged “climate change is a material, direct and current financial risk to the superannuation fund.”
You might be feeling uncertain about how climate change can affect your investments, or unsure if your super fund has even taken climate risk into account.
As a certified financial planner, I understand climate risk and can work with you to help protect your super and investments from an uncertain future. I can answer your questions about fossil fuels and concerns regarding climate change, delivering a retirement plan you can feel confident in.
The legal case was a world first between Mark McVeigh, a 25-year-old fund member, and Retail Employees Superannuation Trust (REST). Mr McVeigh alleged that REST had breached Australia’s Superannuation Industry Act and the Corporations Act, because it failed to provide him with information on how it was managing climate change risk, including physical and transition risks.
Physical risk includes things such as severe weather events and rising sea levels, which can damage assets and have a significant effect on the supply chains of companies that the fund may be invested. Transition risk arises from the decarbonisation of the global economy and includes the effects of divesting from coal, oil and gas companies, investing in climate solutions, regulatory requirements to reduce greenhouse gas emissions, plus the consequences of stranded assets in the fossil fuel industry.
Mr McVeigh said the lawsuit provided “a ground-breaking recognition of the material financial risk that climate change poses to the economy and society, and the role that super funds have in managing it.”
“I hope it will go some way to catalysing the Australian super fund industry, which, with almost $3 trillion under management, has the potential to make or break our climate response.”
The super fund has agreed to target net-zero portfolio emissions by 2050, disclose all investments and use stress testing and scenario analysis to manage climate risk in its investment strategy.
The terms on which the parties agreed to settle will have implications across many areas of finance and investments. The fact that the law has sided with the super member and not the giant super fund sends a signal to all those that bear responsibility for other peoples’ money: climate risk needs to be a part of fiduciary duty. The case could force super funds to change the way they invest, and it may set the precedent for climate risks to become part of financial advice.
If you’d like to reduce climate change risk in your super, here’s what you can do about it:
- Ask your super fund what they are doing to mitigate climate risk –
Are they taking into account the physical and transition risks as we attempt to lower carbon emissions across the globe? Something to consider too: just because a super fund provides a ‘sustainability’ option, it may not be much better than the default option. You may be holding many companies that contribute to the fossil fuel industry, even if you think you’re doing the right thing.
- Research the companies that your super is invested in –
The Australian stock market has a strong bias towards mining and banking stocks. In fact, the top ten stocks on the ASX include BHP (mining of fossil fuels) and the Big Four banks (financing of fossil fuels). This means that super funds that include the Australian stock market in their portfolios are very likely to be exposed to the fossil fuel industry. Market Forces provide lots of great information on companies that are failing to reduce greenhouse emissions and even a list of super funds and their coal, oil and gas investments. Is your super invested in fossil fuel companies?
- Seek out great advice –
You don’t need to do the hard work; you can chat to an adviser that understands how important a safeguarded retirement plan is to you. Not only should your adviser be able to have in depth discussions with you about climate change, but also know the risks involved and how to mitigate them.
If you would like to feel confident that your retirement plan considers the long-term risks of climate change, book a chat with me. Together we can work out what is right for you, taking into account any concerns you have, so you can feel good about where your super is invested.
Want to know more?
Speak to me about how responsible funds may work in conjunction with your overall financial plan.
IMPORTANT; This information is general in nature only it does not take into account your individual circumstances. We recommend that you seek professional advice before making any investment decision.
Please call 08 8363 8810 or email pgarner@novowealth.com.au to discuss.
All the best
Paul Garner CFP®
Certified Responsible Investment Financial Adviser
This article was written in collaboration with Paul Garner of Novo Wealth and Alexandra Brown of Invest with Ethics
