Future Business Generation has called on the superannuation industry to provide more sophistication in climate risk assessment and management, on behalf of Millennials that will retire in the post-2030 world.
Future Business Generation, a networking group within the Future Business Council, aims to represent millennial workers and savers, who will retire post-2030 into a world which will be transitioning into a low carbon economy in the mist of the physical impacts of climate change.
The group has issued its first research project, Climate Change, Superannaution and Millennials, which examines how the $2.6 trillion Australian superannuation industry is assessing and managing climate-related financial risks.
The report finds that superannuation funds that participated in the process are “increasingly prioritising climate change as a legitimate risk to the long-term sustainability of their investment portfolios,” and that good practice appears to be emerging. Future Business Generation invited superannuation funds to participate in the research process, and noted that all of the participant funds deployed some level of screening out of fossil fuels as a risk mitigation strategy.
“We are looking at empowering Millennials to better understand their super,” says Oshadee Siyaguna, primary researcher on the paper and committee member of Future Business generation. “We decided, let’s look at climate change. If you look at a range of funds, from Future Super to Australian Super to Australina Ethical Investments, there is quite a bit of interest within the industry when it comes to managing climate risk. When we looked at it, one thing that popped up immediately is that it seemed like Millennials are attracted to the screening aspect of investment management, but some funds need to get better at advertising their activities, because Millennials are not aware of everything else out there in the market.”
The paper notes that “integration of climate risks into core risk management systems are still evolving “to cope with the complexity of climate change and its implications to investments.”
“Lots of different super funds are doing lots of different things, so let’s bring up the best practice examples, which should also be useful for superannuation funds,” Siyaguna says. “Writing the report took us quite a while because we had to write to audiences that didn’t know a lot of climate change and super. This report is mainly written to a retail audience that doesn’t know much about this and wants to understand what was going on beneath the strategies that super funds use.”
Negative screening of fossil fuel exposures may be popular with Millennials, but managing the complex risks of climate change goes beyond that, Siyaguna notes.
“One of the things we pointed out in terms of screening is that screening tends to manage risk, as the first order level,” he says. “That’s fine, but if those emissions lay outside in the economy and there are people who want to mitigate climate change, there are other points of the portfolio that need to be managed. If negative screening is the primary part of the strategy. Other risks – that may lie out there and can have impacts across the economy and will impact on the rest of your portfolio. First order impacts like screening are straightforward and verifiable, but the story is more complex, which is where ESG integration and engagement comes in.”
To that end, Future Business Generation also calls for more disclosure by superannuation funds, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).