The Asset Owners Disclosure Project (AODP) last week reveals that only 13% of savings collectively managed by the world’s 100 largest public pension funds have undergone formal assessment for exposure to climate-related risks, leaving $9.8 trillion (£7.5 trillion) unprotected from the economic shocks of global warming.
Considering the financial relevance of climate-related risks and opportunities, as clearly outlined in the recent climate warning by UN scientists, this exposes almost 90% of assets managed on behalf millions of savers worldwide to potential losses in the long term.
According to AODP, part of the responsible investment organisation ShareAction, pension funds are most aware of the risks associated with fossil fuel dependent investments. However, this awareness does not yet seem to have translated into action, with 85% of funds having no formal policy for excluding thermal coal. Among the range of formal climate policy commitments made by pension funds, those related to fossil fuels are among the least popular, while company engagement features as the most popular.
50% of pension funds have been found to undertake some form of company engagement with high-carbon companies. However, despite recognising the regulatory and transition risk of fossil fuel investments, these efforts focus largely on improving disclosure, instead of driving action. Furthermore, results indicate an ‘escalation gap’, with only a minority of pension funds (18%) escalating their engagements in case of failure, such as by using votes at AGMs, co-filing key climate resolutions, or setting time-bound objectives.
With almost 200 nations having ratified the Paris Agreement, only 10% of the largest public pension funds have made formal pledges to align their portfolios with the goals of the Paris Agreement, including Sweden’s AP7 and Finland’s Varma. A further 25% of funds have developed various forms of formal climate-related policies, while a staggering 65% of funds either have no policy, or a broad ESG or responsible investment policy that contain no specific references to climate change.
Promisingly, almost a fifth of pension funds are already performing climate scenario analysis in their investment portfolios, despite the TCFD recommendations only coming out last year, with a further 10% considering how to approach it.
The responsible investment group recently published a global ranking of these public pension funds on their overall climate performance, and found that European funds were leading the pack, and three UK funds achieving disappointing results.
Peter Uhlenbruch, AODP investor engagement officer, said: “The large public pensions funds we assessed are universal owners of our global economy. Though almost a third have identified the physical and transition risks facing their portfolios, their policies on fossil fuels and engagement pale in comparison to challenge we face. As a sector, pension funds need to summon the courage to transform this knowledge into action, through taking real steps forward in their company engagement and asset allocation to ensure the retirement pots of their beneficiaries are truly protected and preserved.”
Dutch pension funds
Five Dutch pension funds have been included in the assesments: