You can’t stock-pick your way out of environmental collapse, superannuation boss warns

David Neal, whose IFM Investors manages $200bn, says global heating could slash portfolios by up to 40%

Pension funds must use their global power as big investors to push “the new clean economy” to avoid an environmental collapse that could slash the value of their portfolios by as much as 40%, an Australian superannuation chief says.

David Neal, the chief executive of IFM Investors, which manages $200bn for superannuation savers, says pension funds could not avoid the effects of global heating simply by not investing in carbon-emitting companies.

“You can’t stock-pick your way out of systemic risks like climate change,” Neal told a Governance Institute conference on Tuesday.

“They will and are impacting our entire economy. And these impacts will compound such that future market returns will deteriorate and many of the superannuation members we are investing for will have much lower retirement incomes as a result.”

He said a disorderly transition to net zero emissions by 2035 was conservatively estimated to slash 14%, or US$7tn, from pension assets if not done in an orderly way.

“That’s a lot of pensions not paid,” he said. “That’s a lot of workers delaying their retirement and a lot of workers with a less dignified retirement.

“It also constitutes a failure of our fiduciary obligations to investors.”

He said “losses would be even higher if there is a failure to transition to net zero”, at up to 40%.

Pension funds should pour money into the infrastructure needed to run a clean economy, as well as help wean Europe off its reliance on Russian gas, he said.

A second, but “harder to execute” priority is to push existing big emitters to “get those emissions down”.

“In the case of infrastructure, by definition these are essential services,” he said.

“We cannot simply turn them off today.

“If a district heating business runs out of power, millions of people potentially freeze. It’s crucial we recognise the urgency of the transition task, but equally we must plan and be organised about how we achieve it.”

He criticised funds that have ditched emission-heavy companies, saying that “driving the emissions of individual portfolios down by selling emission-heavy assets won’t have a systemic impact” and could starve businesses of the money they needed to clean up their operations.

“Now of course there’s a point where if a business is unwilling to engage then selling out is the appropriate thing to do – if you can’t influence change then managing your portfolio risk is the only consideration left,” he said.

“But this should be a last resort.”

He said pension funds should also use their “staggering” collective weight to collaborate with each other to deal with systemic risks such as global heating.

“As our task becomes bigger and more urgent, I think we need to push harder on these initiatives to make them as effective as possible,” he said.

cover photo: Flooding in Bulahdelah, NSW in March 2021. David Neal, the chief executive of IFM Investors, says pension funds cannot avoid the effects of global heating simply by not investing in carbon-emitting companies. Photograph: Mike Bowers/The Guardian