New analysis has uncovered Australia’s top 30 superannuation funds are at risk of a 46 per cent drop in investment returns due to the physical risks posed by climate change.
According to Ortec Finance, a technology and risk management solutions provider for financial institutions, both transitional and physical risks of climate change are set to have a significant impact on the portfolio returns of Australian super funds.
The firm’s analysis applied seven possible climate scenarios to the top 30 largest super funds by assets under management, ranging from hitting net zero by 2050 to high warming scenarios where the average global temperature rises to 3.7 degrees Celsius by the turn of the century.
Over the short term, Ortec Finance found that super funds’ investment returns could see a decrease of up to 18 per cent if a disorderly green transition to net zero were to materialise.
This figure jumped to a potential decline of 46 per cent in a longer-term scenario where decarbonisation does not occur and severe physical risks intensify further.
A key reason for this is super funds’ high allocation to equities, which are highly sensitive to short-term transition risks, said Doruk Onal, climate risk specialist at Ortec Finance.
“The funds are particularly vulnerable to sudden or disruptive transition measures, especially where they have equity investments in energy and carbon-intensive sectors, where regulatory changes or shifts in market dynamics could significantly impact valuations,” Onal said.
Meanwhile, funds’ growing exposure to real estate and alternative investments, including private equity and infrastructure assets, also puts them at a higher risk.
Extreme weather events prompted by rising temperatures are likely to adversely affect agriculture, labour, and industrial productivity, therefore also impacting real estate and equities.
With these two asset classes collectively comprising over half of a super fund’s portfolio on average, such outcomes could lead to 60–70 per cent lower returns than anticipated, Ortec Finance found.
With these possibilities in mind, Onal urged Australia’s superannuation industry to consider making investments towards the low-carbon transition if they haven’t already done so.
“Based on the insights derived from our most extreme scenarios – which underscore the significant risks associated with maintaining a carbon-intensive investment strategy in the long term – superannuation funds should consider investing in and enabling a strategic transition to a low-carbon economy,” he said.
“If they decide to go down this path, they can contribute to mitigating some of the future physical risks of unaddressed climate change while potentially unlocking new investment opportunities that contribute to stable long-term returns. However, a key challenge remains. What measures can effectively guide the global economy on the path to transition?”
Looking ahead, Ortec Finance said the ability of super funds to anticipate and adapt to climate-related risks will be critical to maintaining sustainable, long-term growth while meeting their fiduciary duties.
