World's pension funds vulnerable to climate risks, study reveals
87% of assets managed by the world's 100 largest public pension funds are yet to undergo a formal climate risk assessment, according to research published on Tuesday (23 October), with only 15% of them adopting a coal exclusion policy.
While 200 nations have ratified the Paris Agreement, only 10% of the largest public pension funds around the globe have made formal pledges to align their portfolios with the 2°C warming target agreed in the French capital, according to research by the Asset Owners Disclosure Project (AODP).
Only 13% of savings collectively managed by the world’s 100 largest public pension funds have undergone formal analysis for exposure to climate-related risks, such as storms, floods, heatwaves and hurricanes. And a staggering 65% of funds have no responsible investment policy with specific references to climate change.
This leaves $9.8 trillion of assets unprotected from the economic shocks of global warming, AODP warned, saying this poses a risk for investors.
Exposure to climate-related disasters such as floods, storms or sea-level rise can have a huge impact on property and infrastructure, destroying value and raising insurance rates overnight.
AODP recently published a global ranking of public pension funds based on their overall climate performance and found that European funds were leading the pack.
Sweden’s AP7 and Finland’s Varma were among the few to stress-test their portfolios against the Paris goals, confirming the reputation of Scandinavian countries for being frontrunners on climate policy.
According to the AODP research, around half of pension funds around the world are undertaking some form of climate-related company engagement, but this largely focuses on improving disclosure instead of action.
Furthermore, only a minority of pension funds (18%) have a policy to escalate their engagements in case of failure, such as by using votes at AGMs, co-filing key climate resolutions, or setting time-bound objectives.
Best interest investments?
Pension funds are by definition supposed to act on the long-term, investing in the best interest of their beneficiaries, said Paul Simpson, the CEO of CDP, a UK-based organisation formerly known as the Carbon Disclosure Project.
“When we’ll retire in thirty or forty years, they can either offer the most amount of money in a 4°C unsafe world or an optimal amount of money in a safe and stable world. I clearly prefer the safe and stable world,” Simpson told EURACTIV in a recent interview.
However, he said few were actually incorporating this information to protect their assets, calling for “clearer progress” in the way investors are implementing their fiduciary duty in practice.
“The large public pensions funds we assessed are universal owners of our global economy,” AODP's investor engagement officer Peter Uhlenbruch added.
“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,” he added, calling on the sector to take action.
“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.”
This article first appeared on EurActiv.com, an edie content partner