As one new report shows, pension funds with trillions of dollars in retirement assets are coming under increasing pressure to take into account the financial risks that climate change poses for their portfolios.
Pension Funds and Climate Change
According to the report from the Asset Owners Disclosure Project (AODP), a nonprofit that analyzes the portfolios of pension funds and insurance firms, 60% of the world’s 100 largest pension funds have “little or no strategy” to deal with the financial repercussions of climate change on their investments.
The group—which is part of ShareAction, a charity that promotes responsible investing—reported that only 10% of the pension funds it investigated had introduced policies to exclude coal from their investment portfolios. AODP said the pension funds, with more than $11 trillion in assets, had invested $90 billion in low-carbon technology—less than 1% of their total assets.
European funds, especially those in Sweden and the Netherlands, led AODP’s rankings of the pension investors with the best records on climate change, while in the US, California and New York had some of the highest-rated funds, despite a relatively poor showing across the rest of the country.
In an effort to boost recognition of the financial impact of climate change and provide investors, lenders, and insurers data about companies’ environmental risks, the global watchdog known as the Financial Stability Board created an industry-led Task Force on Climate-related Financial Disclosures (TCFD) in 2017. A report from the Environmental Audit Committee (EAC) looked at what actions pension funds had taken to follow the TCFD’s recommendations and reported that most companies do not disclose the financial implications of climate change. Describing a handful of funds as “worryingly complacent,” the EAC report said that nine of Britain’s 25 largest pension funds have no plans to report in line with the recommendations of the TCFD—and only 12 funds have discussed the financial risks stemming from climate change with their boards of directors.
Despite the “worryingly complacent” minority, most pension funds in the UK are considered by the EAC to be “engaged” or even “more engaged” when it comes to climate change.
Despite a slow start, funds are making progress—and the move toward considering the relationship between the health of pension funds and climate change together is reflected in initiatives from state governments and other organizations.
The TCFD issued its first report in September 2018, noting that most of the 1,700 firms surveyed had disclosed information in line with at least one TCFD recommendation concerning the companies’ sustainable governance practices, the processes used to identify and manage those risks, and the metrics and targets they had adopted. To help companies comply with the TCFD’s voluntary requirements, a nonprofit called the 2° Investing Initiative created an online tool that allows firms to measure how their equity and corporate bond portfolios align with the TCFD’s environmental goals.
On the state level, the California state legislature voted in September 2018 to require that two of the state’s largest public pension funds—the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS)—take account of climate-related financial risk and report on what progress is being made toward meeting the goals of the Paris Agreement. The California bill casts a wide net in assessing climate impact, including risks posed to the two funds by storms, temperature rises, and economic harm brought on by carbon emissions. In New York, the state government is pushing an ambitious agenda on climate, including increasing the use of clean energy and reducing greenhouse gas emissions.
And according to Pensions & Investments, despite the “worryingly complacent” minority, most pension funds in the UK are considered by the EAC to be “engaged” or even “more engaged” when it comes to climate change. Twenty of the 25 funds examined reported taking at least one action related to climate risk. EAC chairwoman and member of Parliament Mary Creagh said, “It is encouraging that a majority of the UK’s largest pension funds say they are taking steps to manage the risks that climate change poses to U.K. pension investments.”
Pension funds that don’t consider climate change are finding the numbers stacked against them as more governments and organizations reinforce the connection between financial success and environmental responsibility. Fortunately, leaders in the space are setting a strong example.