Future Fund boss David Neal: climate change has first order economic impact

The $166bn Future Fund demands its investment managers factor climate risk into their decisions, its CEO says.

Future Fund CEO David Neal fund has agreed with the nation’s top regulators on the financial risks posed by climate change and said the $166 billion sovereign wealth fund demands its fund managers factor climate risk into their decisions.

Appearing before a Senate Estimates committee on Tuesday, Mr Neal endorsed the views of the Reserve Bank, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission that climate change and the conversion to a low-carbon economy or a world with more erratic weather would have “first-order economic effects”.

“We agree with those statements,” Mr Neal told senators.

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“We think the appropriate response is to understand the nature of the risk of climate change and many other risks posed to our portfolio,” he said. “We seek to make sure those things are understood and factored into the prices we pay for assets. We seek to understand the processes and techniques and processes (the fund’s investment managers) use to understand those risks.”

RBA deputy governor Guy Debelle was the third leading regulator to speak on climate change at the Centre for Policy Development in three years. He said in March that the threat of climate change required an immediate but orderly transition to ensure financial stability.

APRA had first warned business directors were legally liable if they didn’t factor climate change into their business plans, a position endorsed a year later by the Australian Securities & Investments Commission’s John Price.

The entire Australian equities exposure of the Future Fund is managed by Macquarie Group, while State Street Global Advisers runs the entire emerging market equities exposure.

Future Fund chief investment officer Raphael Arndt said the fund was supportive of companies being open about their exposure to climate change risk.

Dr Arndt said the fund did not seek disclosure on climate risk for short-term trading, but though it was “appropriate” to seek information on climate risk for investments that are “held for a long time”.

“The future path of carbon pricing and the market reaction to that is a long run risk,” Dr Arndt said.

He said the approach of the fund’s investment managers to managing climate risk was “one of the issues that would be on the agenda when we are assessing their performance”.

The physical risks presented by climate change, such as greater damage from extreme weather events affect the economy and financial markets through supply chain disruption, lower productivity and falling asset prices. Transition risks as the business world adjusts to a lower carbon environment involve companies being vulnerable to changes to regulation, technological obsolescence, and also legal risks from the prospect of boards ignoring the risks climate change presents.

According to a survey of Australia’s largest financial institutions by APRA, a third of the 38 largest banks, insurance companies and superannuation funds believe climate change is an immediate “material financial risk” to their businesses while a further 20 companies believe it will be a risk in the future.

The Future Fund has grown to $165.7 billion at the end of September, up from $148.8 billion a year earlier. Big rallies in stocks that began late last year helped add nearly $17 billion the value of the Future Fund and kept it on track to outrun its target returns.