For decades the issue of climate change in Australia was simply a topic for debate.

While sections of the financial services and superannuation industries had moved to address climate change risks, a policy vacuum largely relegated the issue to a topic of discussion and an area of inaction.

In 2007, a change of government sparked a policy reawakening for climate change, beginning with Australia's ratification of the Kyoto Protocol in December 2007.

The Federal Government is planning to introduce a carbon emissions trading scheme (ETS) in 2010 and has set a renewable energy target of 20 per cent by 2020 for industry.

The Government's initiatives have the potential to create an unfamiliar and confronting investment landscape, but also one of opportunity.

So what will an ETS mean for the financial services and superannuation industries?

Investment flows begin
For investors the initiatives will initially bring a level of certainty and potentially greater investment in the renewable energy sector.

"There is now a little more certainty in the timing of the scheme. Fund managers can start to look at the opportunities that will arise as result of the carbon trading scheme," Colonial First State Global Asset Management (CFSGAM) head of sustainability and responsible investment Amanda McCluskey says.

KPMG climate change adviser Paul Gilding also says that while there is no certainty yet in the carbon pricing mechanism, the Government targets still give a level of guarantee.

"We don't' know for certain what the price will be in the short or medium or long term, but a target can help as it gives you a guarantee that 20 per cent of power needs to be derived from renewable energy sources," Gilding says.

He highlights Worley Parsons as a case in point.

The resource company will be teaming up with BHP to look at developing solar thermal power stations.

"The company said they could never do that without the mandatory renewable energy target (MRET). And you need to have policy like that if investors are going to put their money into those sorts of projects," Gilding says.

For Eureka Funds Management, the Government move has given the fund manager the green light to develop more than 4000 hectares of wind farms in Tasmania.

Located at Robbins Island and Jims Plain, the two farms will be part of Eureka's clean technology fund, which was developed over 12 months ago.

"For us it was necessary for the government to change in order to get the fund going," Eureka managing director Bob Kelly says.

While the fund is focused on renewable energy, wind farming will make up the bulk of the assets, Kelly says.

"Wind is a mature [renewable energy]. We know the technology is available and the resource is not dependent on fuel," he says.

In order to meet the MRET, he says that theoretically a mix of renewable energy, such as wind, biomass, geothermal and solar, will need to generate 12,000 megawatts of installed renewable energy capacity.

Of that, wind will be generating two-thirds of the energy, he says.

"Our estimated cost could be $3.5 million to $4 million per installed megawatt, so that could be $50 million to $60 billion investment," he says.

Globally the impetus for renewable energy development and investment has begun.

A report by global group the Renewable Energy Policy Network (REN) notes renewable energy supplies 18 per cent of the world's final energy consumption, including traditional biomass, hydropower, wind, solar, geothermal and biofuels.

In 2007, more than $100 billion was invested in new renewable energy capacity, manufacturing plans, and research and development, according to REN.

For Australia, however, the renewable energy industry is playing catch up following a lag in policy, according to industry participants. Gilding says it is a very young industry in terms of companies that have the technology to own and operate the resources.

"Many developments have gone offshore because of the lack of policy setting. But now we have the capacity to stay in Australia and invest in Australia," he says.

While the international market has grown and developed, international investors are eyeing Australia for potential opportunities to develop renewable energy, he says.

"I am working with a major international investor at the moment at sourcing opportunities in Australia. We are a long way behind climate change policy, but our natural benefits mean we have the opportunities to develop renewable energy resources such as geothermal and solar energy. International investors see this local potential more than Australian investors do," he says.

Weathering the risks
As renewable energy resources emerges as an asset class, for many superannuation funds the attention will be on the immediate risks from climate change across all investments in a portfolio.

The Government's initiatives spurred the Australian Institute of Superannuation Trustees (AIST) to commission United Kingdom-based research firm Trucost to look at the impacts of carbon trading on the superannuation industry.

"Emissions trading will have major implications for the Australian economy and potentially on fund returns," AIST chief executive Fiona Reynolds says.

"We believe the unique characteristics of the Australian economy warrant an in-depth investigation of the carbon footprint of Australian markets and managers, so institutional investors have some guidance into the potential impact of emissions trading," Reynolds says.

The research will examine the carbon footprint associated with 100 Australian equity portfolios with a combined value of $32 billion, managed by a total of 14 AIST member superannuation funds.

The research results will be launched at an association conference later this month. For Reynolds, the study is an important step forward in generating awareness and furthering debate around the issues of climate change as well as highlighting opportunities for super funds and their portfolio managers to reduce the carbon footprints of investment portfolios.

Similarly, asset consultant Frontier Investment Consulting undertook a major research report in the area, which was in part driven by client concerns.

Frontier managing director Fiona Trafford-Walker says under the new environment, investors will need to be more vigilant with asset classes such as infrastructure.

"Assets like toll roads and airports will be affected by the cost of carbon and its likely impact on motor vehicles. Carbon pricing will also affect listed companies such as steel firms, while property will also be affected, however, property has come a long way in terms of addressing green issues," Trafford-Walker says.

Similarly, McCluskey says Colonial is looking at both its infrastructure and property assets.

Its stake in the UK-listed utility Anglican Water, for example, will be assessed for the physical impacts of climate change.

"Obviously with the utilities located on low-lying areas, we have to think about how to adapt our infrastructure assets," she says.

For Kelly, portfolio exposure to renewable energy could be one way to mitigate climate risk.

"The issue of climate change is downside for a lot of asset classes. A major risk relates to inflation particularly as electricity prices are set to rise. By investing in this sector, you can effectively hedge your portfolio against inflation, including fuel price volatility," he says.

For now, the immediate climate change risk is simply the lack of information from listed companies. Getting the right information
McCluskey says there is always a level of uncertainty when it comes to putting together an emissions profile of a company.

"To date companies have not provided us with consistent greenhouse data. While the national greenhouse reporting scheme will give us more insight into the emissions trading of companies, at the moment we don't have consistent and meaningful data," she says.

Although VicSuper began to engage companies on climate change eight years ago, fund chief executive Bob Welsh has not seen any improvement in company data in terms of carbon emissions.

"A lot more work [needs] to be done. The companies that are more exposed like BHP know what the risks are, but smaller companies, those outside the major listed companies but still employ the bulk of Australians, are way behind in terms of what the risks are," Welsh says.

Welsh, however, says that as part owners in companies, superannuation funds must maintain their pressure on the companies they invest in to ensure continued corporate vigilance on climate change.

"Every single company is going to be affected by climate change. As an investor you can't diversify away from the problem as you have to invest across all industry. We try to encourage the companies to put in place the strategies that will minimise the impact of climate change on their business," he says.

Climate skills
Emerging asset classes and risks will mean trustees and investors need to be equipped with the skills and expertise to understand the new investment landscape.

Some organisations are even moving to create jobs in the area.

In March 2008, CFSGAM hired McCluskey to the newly-created role she now works in. The firm had signed up to the United Nations Principles for Responsible Investment (UNPRI) and was looking to incorporate the principles into its investment process.

The firm has also hired two property division analysts who will concentrate on sustainability issues.

KPMG hired Gilding, a former Greenpeace International executive director, to advise the global consultant on climate change issues. 

Regulators may also need to beef up their compliance teams in preparation for the proliferation of clean technology or green funds.

Kelly says there is no doubt many fund managers will be looking to take advantage of opportunities in climate change and regulators will probably need to implement a green auditing process.

Welsh says he believes superannuation funds will not only need to add more people but also place those people with expertise in climate change or sustainability into a more strategic role within the organisation.

In 2001, VicSuper established an executive position within the fund that focused simply on sustainability issues.

"Trustees see climate change as another investment risk although it is the main one. We are already moving in the right direction. Many funds are already members of the UNPRI. This is now a fantastic opportunity for superannuation funds to raise the awareness of climate change in the industry," Welsh says.

Nevertheless, he says the industry will still need to be alert to government policy in the area.

"It's great talking about emissions trading, but what we need is a sense of urgency. We still need major policy decisions in order to push down the level of carbon emissions and that is a great dilemma for government," he says.