Posted by Gilmour Poincaree on December 5, 2008

Last Updated – December 04th 2008

by John Kavanagh


Blair Comley wants people in the investment community to change the way they think about the Australian Government’s climate change policy. With over $1 trillion sitting in Australian superannuation funds, the scope for changing the investment landscape is huge. Even a subtle shift in investment decisions by the managers of this capital could go a long way to unlocking some of this money and, in turn, help to achieve those policy goals.

BLAIR Comley, deputy secretary of the Department of Climate Change, believes companies and investors have become obsessed with the detail and have lost the big picture. They worry about how much a tonne of carbon emissions will cost in the new emissions trading scheme. They worry about how quickly the limits on carbon emissions will be adjusted. They worry about whether they will qualify for compensation and how much they will be entitled to receive. And investors in particular will worry about how many percentage points to knock off their earnings forecasts for polluters.

Comley finds this thinking understandable but narrow. After all, he says, achieving a low carbon economy is a major reform, a structural transformation of the economy. One estimate of the amount of investment required to build clean power generation facilities in Australia to meet the Government’s goals over the coming decade is upwards of $40 billion. The opportunities for investment in infrastructure are enormous.

The other thing that surprises Comley is how impatient business is over the issue, especially the investment community. Speaking at a climate change conference in Sydney in October, he reminded his audience of mostly financial services industry professionals that economic reform is usually a graduated process. Using the example of tariff reform, a major micro-economic policy launched by the Hawke Government in the 1980s, he said it was part of the socio-economic compact to spread the burden of reform by bringing in change over a number of years.

And it is not just a matter of spreading cost in an equitable way. The government knows it risks causing serious damage to the Australian economy if it gets things wrong. One risk factor is leakage – companies moving their polluting activities to economies where the rules are less stringent to avoid having a price and a cap put on their carbon emissions.

The issue of climate change has taken on a great deal of importance for investment managers following the release in July of the Government green paper on the Carbon Pollution Reduction Scheme, and the Garnaut recommendations on emissions reductions. Both papers contain proposals that will have an impact on earnings, costs and investment programs for a wide range of Australian businesses over the coming decade, and both papers put forward a number of options.

The Carbon Pollution Reduction Scheme, also known as an emissions trading scheme, will set a price on a tonne of carbon emissions and determine which companies are included in the scheme and how they are to report their emissions. It will set up a compensation scheme and it will exempt certain industries (see breakout).

The Garnaut paper sets out the blueprint for emissions reduction and, in the process, points to the type of investment that will need to be made in renewable energy, transport, water systems and more.

The Government will publish a white paper in December and most analysts are waiting until then before they start drawing conclusions about how the investment markets will be affected by all of this.

Comley is right in thinking that the investment community is obsessed with detail and short-term issues. Respondents to a survey of fund managers conducted for Corporate Citizen by the Australian Centre for Corporate Social Responsibility (ACCSR) found that they were near-unanimous in saying they were not prepared to make investment decisions around climate change issues until they had a clear picture of the rules and the regulatory framework for the Government’s proposed carbon pollution reduction scheme.

It is those investment managers, analysts and asset consultants not ready to invest in climate change who are guiding the asset allocation decisions of the country’s biggest investors – the superannuation funds. Typical of the response is this comment from Elaine Prior, a senior analyst at Citi Investment Research: “Very clearly, we need a regulatory environment that allows change solutions to become economically viable. At the moment we have a lot of talk about climate change solutions and carbon emissions and so on but we don’t have a regulatory authority. And given that a lot of the things that will cut emissions will cost a lot of money, there needs to be that regulation to act as a catalyst for investment.”

Some specialist managers, however, report that they are finding investment opportunities. The managing director of Australian Ethical Investments, Anne O’Donnell, says an area where strong investor demand is emerging is for green commercial buildings. Community awareness of where energy savings can be made in buildings is relatively high and, as a result, tenants want to move into them and institutions want them in their portfolios.

Helga Birgden, head of responsible investment for the Asia Pacific at Mercer, says superannuation fund trustees with experience in investing in the agribusiness sector are starting to ask about how the issue of carbon sequestration fits into investment in the sector.

Managers in the small, specialist funds groups say the attention of large funds management groups has been caught by the imminent introduction of a system that will put a price on carbon emissions and have a direct impact on the earnings of many of the big companies in which they invest. But, like Comley, they see this as a very narrow focus. They need to look at renewables such as wind, which has demonstrated its viability already, consumer products that will assist households reduce their energy consumption, carbon capture technology, and suppliers to the public transport sector.

But the investment management industry is dominated by large financial institutions and they are fundamentally conservative organisations. Many of them have adopted standards such as UNPRI, the United Nations Principles for Responsible Investing, or ESG (environmental, social and governance) but they tend to use these metrics as overlays for making adjustments to their mainstream equity and fixed interest portfolios. In other words, they might reduce their portfolio weighting to steelmaker Bluescope if it shows up as a bigger polluter than OneSteel. What they are not doing is investing in clean energy start-ups or other businesses with a direct stake in climate change.

What many of the managers argue is that their mandate is to invest conservatively on behalf of people who are committing funds to their retirement savings. It is not their job to take risks on new ventures. And they also argue that the biggest impact of climate change policy will come from changes that big companies make to their business practices.

Survey respondent John Guadagnuolo, an investment manager at Portfolio Partners, says: “For instance, you might decide to invest in a company that participates in a process to capture carbon from coal-fired power stations. You are taking on significant risk because you are betting the carbon price will be high enough to pay off that investment. As a fund manager we might like low emissions or sustainability to be present in a company that we invest in but it’s not a deciding factor. If there’s too much risk it’s not something we can get into.”

Unspoken in all of this is the fear that investment managers have of being caught up in the next bubble, and the reputational damage that would follow. In 2000 the fund manager BT launched a fund called the BT TIME Fund. It was set up to invest in technology and new media and, coming on the crest of the dotcom wave, it was one of the most successful retail investment product launches ever. The wave crashed soon after and the BT fund has been a chronic underachiever ever since. It has reported an average annual loss of 14.5 per cent a year since its launch. No investment manager wants to be associated with such disasters and, in the case of clean technology, managers fear there are too many unknowns. Some investment managers say there has already been something of a bubble around biofuels and that the sector represents more hype than substance.

Some commentators argue that one reason there are too many unknowns is that the investment management industry has been slow to equip itself with the expertise that would allow it to make informed investment decisions in the sector. In October this year, the Financial Services Institute of Australia (Finsia) released the findings of a study it had undertaken with Griffith University Business School, looking into the preparedness of the financial services industry to respond to climate change and its capacity to do so. Like the ACCSR, it found that regulatory uncertainty was the biggest road block for investors, along with a perception that investment in emerging climate change technologies involved excessive risk and low returns.

But it also found that there was a lack of expertise, skills and knowledge about climate change throughout the industry. Finsia chief executive Martin Fahy says most investment managers were prepared to admit their engagement with the issue was inadequate and that there was a lack of leadership within their organisations pushing for change.

Some investment managers are prepared to concede this. Colonial First State head of sustainability and responsible investment, Amanda McClusky, says: “There’s a gap around education. The traditional training for an analyst is a finance degree and most of the education that analysts get does not include sustainability issues and, more broadly, social issues, reputation tracking, human capital and some corporate governance factors.”

The consensus among investment managers in the ACCSR survey was that in five or 10 years time climate change and sustainability will be mainstream investment issues. It took about 10 years for corporate governance to move from the fringe, where a handful of investment managers paid attention to issues of board independence, fair remuneration policies and transparency, to a situation today where investment managers are asked to justify why they don’t vote on director elections and remuneration proposals.

In the meantime, the field will have to be developed by a handful of specialists. One such specialist is Sean Wiles, an investment manager at CVC Sustainable Investments, a venture capital fund that aims to increase Australian private investment in renewable energy and enabling technologies through the provision of equity finance. (Funding is provided under the Australian Greenhouse Office’s Renewable Energy Equity Fund licence as well as from private sources.) Wiles reports that his fund has been investing in emerging Queensland gas producers such as Blue Energy. While gas is not exactly clean, it produces about 40 per cent of the carbon emissions of coal and receives favourable ESG scores from fund managers for that reason.

Wiles says he has trouble getting good research from brokers and investment bankers but has, nevertheless, been able to put together a portfolio of stocks in areas such as renewable energy, waste management and water. It all sounds great until you see the numbers: CVC has a mere $400 million invested across four funds.

In the end, it seems that a mix of strong, sound government policy as well as strong impetus from super clients is what is needed to shift money into climate-aware investment strategies. As Guadagnuolo says, “At the end of the day we’re a fund manager, not a venture capital firm. That makes a difference to how we see things. It’s not our job to develop new technologies, it’s our role to invest our clients’ money as we see prudent. As a venture capital firm you have much higher approval from your investors to take on risk.”




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