NEW REPORT: Are Asia’s Pension Funds ready for Climate Change?

10 April 2019

Climate change is multiplying risks for investors in Asia, and unless unprecedented actions are taken we are on track to a 3°C world, with serious, severe impacts on water resources. Investment portfolios of Asian asset owners are uniquely exposed, putting the continent’s savings at risk, says the new report.

The report highlights that Asian pension funds already face shortfalls due to an aging population and that this could be exacerbated by water and climate risks to their investments.

“Asia’s water resources face a triple threat – not enough water to develop; climate change exacerbating water scarcity and our assets and populations are clustered along vulnerable rivers” warned Debra Tan, who heads China Water Risk (CWR), a leading think tank on water security. “If these threats are not factored in, Asian banks and insurers may well inherit the water and climate risks of their clients” she added. CWR’s research shows that over US$4trn of GDP and almost half of Asia’s population is housed in the basins of just 10 rivers; four of which are projected to see shrinkage in the next 50 years. Yet, 92% of climate finance does not protect assets globally, leaving people and businesses vulnerable to climate impacts already baked into the system.

“Asian asset owners are uniquely exposed to climate and water risks as a large share of their investment portfolios tend to be concentrated in their domestic markets, which will bear the brunt of global climate change losses” said Emily Chew, the global head of ESG Research and Integration at Manulife Asset Management. The report highlighted that available data for the asset allocations of 30 large public pension funds, sovereign wealth funds, and central banks from 12 Asian markets—including Japan, South Korea, China, Hong Kong, Singapore, and India—shows high allocations to their respective domestic markets; in some cases as high as 80-100%. Chew added, “Asian asset owners may not be able to diversify geographically due to economic, political, and regulatory reasons. This leaves them no choice but to face the new normal and systematically price climate into their portfolio returns”.

In addition, some governments are already regulating for a future with limited water, such as China. If the economy runs on water, less water points to a new development model. Such water transition risks are imminent, and they are material as they will disrupt global trade and multiple supply chains.

Investors in Asian assets may not be fully aware of such inter-linked risks. To better navigate the new risk landscape, the report identifies five key water and climate risks to illustrate how the portfolios of Asian asset owners might be affected. These include the impact on logistics from rising sea levels and storm surges; increasing risks from extreme weather events affecting dense areas and regulatory risk triggered by water-nomic policies.

According to the report, the Nikkei 225 and KOSPI are particularly vulnerable to logistics and supply chain disruptions, whilst the Hang Seng Index and Straits Times Index are skewed towards financial institutions, which are prone to systemic shocks from clustered risks arising from lending to multiple sectors in concentrated locations.

However, big risks come with big opportunities. The report’s analysis of 1.5°C, 2°C, and 3°C temperature change scenarios shows that while Asia is more exposed than the rest of the world to policy risk, it also has the greatest opportunity to benefit from low-carbon transition technologies. Asian asset owners can lead the way: their actions can be significant as the ratio of asset owners’ domestic investments to country GDP can be as high as 25-45% according to the report. “If Asian pension funds and other asset owners start to act on their water and climate risks, it would lead to improved resilience and better outcomes in their investment portfolios. In addition to strengthening returns, this would also ultimately benefit all communities in the region,” said Rebecca Mikula-Wright, Director of AIGCC.

The report, therefore, urges investors to map and assess their water and climate risk exposure and price in the prospect of new “water-nomic” regulations. Engagement with investee companies, fund managers, and using voting rights are also recommended. Such actions will help asset owners better protect their portfolios and more importantly savings across Asia.