Investors should consider the impact of a “meaningful” carbon price on investments to better identify risks and opportunities, a paper by Al Gore’s Generation Foundation has urged.The white paper praised companies assessing investments using a shadow carbon price, as there is currently no single framework for the cost of carbon – despite recent moves by China and the US that will see around half of emissions priced by the end of 2016.“The reality, however, is that carbon largely remains an un-priced externality in financial markets today,” the report says.“Although it is impossible to know the exact timing of the prospective tipping point when financial markets will fully internalise carbon risk, it is critical for investors to prepare for its inevitable impact over the next five years.” In ‘Allocating capital for long-term returns’, the foundation, funded by Generation Investment Management, also warns that investors risk breaching their fiduciary duties if they fail to consider environmental, social and governance (ESG) matters during the investment process.The view will be one shared by the Asset Owners Disclosure Project, which recently launched an initiative that could see members sue pension funds where they perceive them to be ignoring environmental risks. Gore, who co-founded Generation IM three years after his unsuccessful US presidential campaign, was adamant sustainability should be taken into account.“The importance of sustainability to business and investing has intensified as financial markets are forced to address challenges posed by the realities of natural resource scarcity, the effects of unabated carbon emissions, rapid urbanisation and widening wealth inequality, to name just a few,” he said. The paper further pointed to the importance of considering sustainability factors, such as human capital management, supply chain concerns and resource management, when assessing the value and success of a company.“Analysing a company’s attitude to these factors can often provide insights into a company’s long-term vision, its strategy for implementing that vision and the probability of its success,” it says.Carbon prices, or a greater number of emissions trading schemes, have long been a demand of various investor groups calling for regulation to mitigate climate change, including the Institutional Investor Group on Climate Change.
ABP’s headquartersNote: This article originally incorrectly stated that contributions would increase to 25.1%. ABP’s current coverage ratio has also been updated in the final paragraph. In 2017, ABP’s premium funding ratio stood at 69%, but the pension fund could not say what this coverage was in 2018 or what level it was expected to be for 2019.The civil service scheme was the first large pension fund in the Netherlands to set its contribution level for 2019.Consultancy Willis Towers Watson has said that ABP’s increase probably would not be indicative for other pension funds, as the observed slowdown in the rise of longevity was more likely to lead to a modest contribution reduction.In 2014 and 2015, ABP’s premium level dropped as a result of a reduction in tax-facilitated pensions accrual, forced upon the pensions sector by the government.With the latest contribution rise, premiums are approximately back at the 2013 level, albeit with a lower accrual rate.ABP’s current coverage ratio is approximately 102%, short of the minimum required level of 104.3%. It needs to raise its funding above this level by the end of 2020 to prevent benefit cuts. The €409bn Dutch civil service scheme ABP is to raise contributions to 24.9% of salary from next year.The increase is the third consecutive one since 2016, when the premium level stood at 18.8%.ABP said the contribution increase was part of a plan agreed by unions and employers in 2016 to bring the pension fund’s contributions to a structurally higher level, to facilitate more prudent expectations for returns.The three consecutive annual increases were meant to improve ABP’s “premium funding ratio”, which indicates to what extent the amount of pension contributions paid in can be used to finance new pension claims in a given year.
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