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Climate change can pose significant risks – not only to the environment, but to the broader economy and to society as a whole.

 

Typically, climate change risks can be split between:

Physical risks

From the direct impact of climate change on our physical environment, including:

  • through loss of resource availability and biodiversity
  • supply chain disruptions
  • damage to assets from severe weather events such as storms, floods, fires, droughts, tornados, hurricanes/monsoons, tsunamis and earthquakes
  • rising global average temperatures; and
  • rising sea levels and ocean carbonisation.

Transition risks

From the much wider set of changes in policy, law, markets, technology and prices to address mitigation and the adaptation requirements which are necessary for the transition to a low-carbon economy.

Managing climate change risks

At Colonial First State, we recognise that poor company management of climate change risks could result in financial losses, litigation liabilities, and the devaluation of tangible and intangible assets – all of which could impact shareholder value and increase the volatility of investor returns.

It follows that the careful investment management of ESG and climate risks could help to improve potential long-term performance and, as a result, any risk-adjusted returns for investors in company securities and physical assets.

Contributing to change

Climate change poses a risk to our environment, economy and society. In its Environmental and Social framework, the Commonwealth Bank states it is not only committed to playing its part in limiting climate change (in line with the Paris Agreement goals), but in also supporting the responsible global transition to net zero emissions by 2050. Colonial First State supports this statement. Our process is to measure, monitor and report the carbon emissions of equities across the FirstChoice range of products within the CBA Annual Report.


When assessing climate risks, we measure carbon intensity rather than carbon emissions to compare the risks of different companies of different sizes. The recommended measurement for Asset Owners like Colonial First State is the weighted average carbon intensity, which is set by the Task Force on Climate-related Financial Disclosures. This can show what companies are more carbon-efficient and can be used as a proxy for potential climate change risks. For example, companies with higher carbon intensity are likely to face regulatory and carbon-pricing risks.


Below, we show data for the trend of carbon intensity over time for a number of the funds managed by Colonial First State.

Trend of carbon intensity over time

Trend of carbon intensity over time

Data: Sourced from MSCI ESG Data and only applies to the equity allocation of each cohort.

The three FirstChoice Lifestage cohorts shown are representative of all of FirstChoice Lifestage. They represent the largest amount of funds (1970–1974), the largest number of members (1980–1984) and the largest average balance (1960–1964). The data shown here is to 30 June 2020.

 

As you can see from the graph above, the FirstChoice Lifestage portfolios have carbon intensity that has been reducing since we began measuring it in 2016.


For example, the FirstChoice Lifestage 1980–84 portfolio produced a carbon intensity measure of 374.63 tonnes of carbon per $M sales (USD) at 30 June 2016, which reduced to 310.79 tonnes of carbon per $M sales (USD) at 30 June 2020 – a reduction of 17%.

 

Within our multi-manager portfolios, it has been a similar story. The three FirstChoice Multi-Manager portfolios shown are representative of all of our FirstChoice Multi-Manager portfolios. The data shown here is to 30 June 2020.

Trend of carbon intensity over time

Data: Sourced from MSCI ESG Data and only applies to the equity allocation of each cohort.

As you can see from the graph above, the FirstChoice Multi-Manager portfolios’ carbon intensity has been reducing since we began measuring it in 2016.


For example, the FirstChoice Growth portfolio produced a carbon intensity measure of 218.80 tonnes of carbon per $M sales (USD) at 30 June 2016 which reduced to 157.35 tonnes of carbon per $M sales (USD) at 30 June 2020 – a reduction of 28%.

 

Disclaimer

Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. CFSIL also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36.