A few decades ago, people were concerned about the depleting ozone layer. Then, in the late 1980s, the Montreal Protocol was ratified to phase out ozone-depleting substances. Fast forward to today: the ozone hole is shrinking and is expected to completely close by 2060.
“That says to me that if you get policymakers, business leaders and scientists together you can come to solutions to these kinds of problems,” said James Davis, chief investment officer at OPSEU Pension Trust, speaking at the pension fund’s climate change symposium last week.
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“We can get a handle on the risk of a recession, stock market volatility, even the systemic risk of a financial crisis that we experienced in 2008, but climate change risk is even tougher,” he said. “We know it’s real, we know it’s slow moving. Its impact is not expected to be felt for many years.”
Because the typical investor’s investment horizon is between one and three years, they may think climate change isn’t in their timeframe, noted Davis, but with the spread of severe weather, such as the recent forest fires and floods, the impact is here now.
“We know, as investors in assets, that if there’s uncertainty and rising risk, that eventually is going to get reflected in asset prices,” said Davis. “The market is a very effective discount mechanism.”
Despite the reality of this risk, Davis noted it isn’t being talked about more because responsible investing — or environment, social and government — professionals aren’t speaking the same language as investment professionals.
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OPTrust has a responsible investment committee with representation from every asset class. When Davis first joined the committee, the discussions were focused on compliance. “The conversations weren’t making this risk feel real,” he said. “The problem was there was no measure of the impact of climate change-related risks that an investor could relate to.
“If we’re going to manage this risk, we need to find a way to measure it,” he added. So OPTrust conducted a series of education sessions for the committee to better understand the economic and financial impacts of climate change on their portfolio and assets. It also engaged with partners, including one partner that presented the pension fund with a model to figure out a way to better measure climate-related risks on earnings, which was focused on public markets.
“This was a ‘wow’ moment,” said Davis, noting it allowed OPTrust to match climate change to an investor’s decision-making framework. “The reality is that climate change has the potential to impact our ability to pay pensions,” he added.
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Pension plans need to price climate change risk into their investment decision process much better than they currently do. “Good thing is, we are investors and we’re used to pricing risk. This is what we do all day long,” said Davis. “And the fact is, if we can do this better than our competitors, we might even have an edge.”
The OPTrust is still early in its journey, noted Davis, but although there are climate risks, he also sees opportunities. “Risk and opportunity are often two sides of the same coin.”
This article was originally published on Benefits Canada‘s companion site, the Canadian Investment Review.