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Whatsapp A worker at China's biggest home appliance recycling factory walks past discarded televisions stored for recycling. China will need to invest up to US$30 billion a year to meet its greenhouse emissions goals.

Former Liberal leader John Hewson is worried that many of our pension and sovereign funds are dangerously exposed to climate change risk. In collaboration with the Climate Institute he's encouraging fund managers to fess up to their exposure to carbon intensive industries, and give their investors the transparency they need to protect their money long term.

Climate change poses a 'financial risk' that could dwarf the global financial crisis, according to former federal Liberal leader turned businessman, Dr John Hewson.

The world’s top investment funds control 70 trillion dollars and are 'running a very large portfolio risk in terms of catastrophic climate change', he says.

'They invest about 55 per cent ... in climate exposed industries and only about two per cent ... in low carbon intensive industries,' he says.

'They don't have any easy way of managing that risk. They can't lay it off in a derivative market, in the financial markets. They can’t insure the risk.'

'In terms of financial consequences, it dwarfs the global financial crisis. It could have a phenomenal impact on the value of these companies. Those top one thousand [companies] control more than 50 per cent of all the listed companies on all the stock exchanges of the world. You think of the consequences of getting that wrong.'

A good example is the Future Fund, here in Australia. It manages about 80 billion dollars worth of funds. They spend about 1.2 billion dollars a year on managing that. Their response to us was, they don't have the resources to adequately manage climate risk, to identify and adequately manage it.

Dr Hewson, a former economics professor, is currently Executive Chairman of Australian investment and advisory firm Shartu Captial. He is also working with the Climate Institute on an initiative called the Asset Owners Disclosure Project, which scrutinises where the world’s 'financial powerhouses' invest their money.

'We are focusing on the top one thousand pension and superannuation funds, endowment funds, sovereign wealth funds, insurance companies and so on,' he says.

'In terms of those superannuation funds, they're managing the financial future of people around the world and they have a responsibility to maximise the return to those superannuants over their lifetime.'

So what should these funds do to mitigate their risk of exposure to catastrophic climate change?

'Adjusting within their portfolio, reducing their exposure to some of the climate exposed industries and increasing their exposure to the low carbon intensive industries is their best portfolio response,' he says.

'There are ways to deal with it and that's what we are trying to drive... by surveying these top one thousand, rating them, and hopefully embarrassing them into understanding the magnitude of the risk that they are carrying.'

So far, many funds have responded negatively to the Asset Owners Disclosure Project, pushing back against the drive for greater transparency on their climate exposed investments.

'They don't particularly like transparency. They don't like accountability. There's a fair bit of hypocrisy.'

'They will invest in a company that gives them the full information about how they're dealing with climate risk but as a fund they won't want to declare transparently how they are managing climate risk.'

'A good example is the Future Fund, here in Australia. It manages about 80 billion dollars worth of funds. They spend about 1.2 billion dollars a year on managing that. Their response to us was, they don't have the resources to adequately manage climate risk, to identify and adequately manage it.'

'I can show you a small superannuation fund in Australia that's only got 600 million dollars under management, with three staff, and they've got an excellent system for identifying climate risk and managing it in terms of their investment.'

'The Future Fund is now responding more positively I might say, after a few Financial Review articles. But it does take time to change people's attitudes.'

Dr Hewson says he is considering launching a 'hypocrisy index' to measure how the statements of major fund managers about climate change stack up against their own efforts at risk mitigation.

Climate change and cities Listen to the full discussion on the financial risk associated with climate change at Big Ideas.

Part of the problem, he says, is the short term nature of investment portfolio management.

'A lot of the managers are focused on maximising short term returns, over three months or 12 months or even five years.'

'They are incentivised on that basis and rewarded on that basis.'

He offers an example from his own investment career.

'We managed some money for the Olympic committee. And coming into 2007 I was very concerned the stock market was going to bucket out.'

'Now all the short term managers were saying "just under-weight this, and under-weight that, and you'll ride it out". I'm saying "if the market goes down 50 per cent we're going to lose 50 per cent of our asset value. We can't afford to be in the stock market. We should be out altogether.'

'That's the different perspective. The asset owner’s perspective is long term. The short term manager: they'll come back to me and say the market did go down 50 per cent but we only went down 49.2 per cent in the assets we managed. We've added value by 0.8%!'

'[But] I just lost 50 million. That's the problem we have in terms of different perspectives.'

Listen to John Hewson speak with Paul Barclay on Big Ideas on Monday, August 19, at 8.05 pm.

