‘Pensions in a changing climate’ is the first in a series of four reports on the pensions sector produced by the Asset Owners Disclosure Project (AODP), which is part of the responsible investment organisation ShareAction. The report assesses the world’s 100 largest public pension funds (with combined assets worth over $11 trillion) against the TCFD recommendations. This is the first published analysis of pension funds using the TCFD framework. It highlights the value of the TCFD framework in rigorously and fairly assessing financial institutions. Funds are rated from AAA to D, with an X-rating reserved for those who show no evidence of responding to climate change.
Disappointingly, 63 per cent of pension funds are found to provide very little to absolutely no information on the financial implications of climate change to their portfolios, putting them at risk of breaching their fiduciary duties to savers. Environmental lawyers have warned that such funds may be exposed to heightened litigation risks, as one Australian fund found out when a member took them to court.
Results show that three of the four funds to achieve an AAA - AA rating (AP4, FRR, and ABP) come from Europe, with Sweden and the Netherlands each housing five funds with a leading rating (AAA-B). The strong performance of European funds reflects a growing momentum at the EU policy level in favour of stimulating low-carbon investments, and clarifying investors’ duties around sustainable investments.
The three UK pension funds, USS, Railpen, and Electricity Supply Pension Scheme, received a rating of only CCC or D, and are found to be lagging against some UK insurance companies and smaller funds who are demonstrating clear climate leadership.
Earlier this year, six of the UK’s largest pension funds came under fire by MPs for being ‘worryingly complacent’ on climate risks.
In the US, despite a clear lack of leadership from the national administration on climate change, there are signs that pension funds are fighting back at the state level. In contrast to the overall weak performance of US-based pension funds, New York and California are the only US states to house AAA - C rated funds, showing that innovative and progressive climate-related investment responses are possible, even in a hostile political environment at the national level.
Low-carbon investments in assets like renewable technology are vital for driving the transition to a low-carbon economy. The pensions industry particularly needs to play a central role in stepping up these investments, as the industry accounts for one third of all assets owners’ investments globally. Such investments signal strong risk management and that a fund is seizing profitable opportunities. However, AODP calculated that the world’s 100 largest public pension funds are investing just $90 billion in low-carbon technology, representing less than 1% of their combined assets. This is dramatically shy of the IPCC’s recommended annual investment of $1.1trillion per year that is needed from the investment system, if we are to secure savers’ future financial health and accelerate the transition towards a low-carbon economy.
These lacklustre investment figures are exacerbated by the fact that only 10% of assessed pension funds have introduced policies to exclude coal from their investment portfolio, despite it being the most polluting fossil fuel.
Felix Nagrawala, AODP Analyst, said: ”AODP is turning up the heat on public pension funds who fail to address climate change in their investments. Our comprehensive review of the climate-competence of the industry against the TCFD recommendations exposes those funds who are all talk and no action, and those showing real climate innovation. Pension funds have a duty to serve the long-term interest of their members, which isn’t being met if the money they invest is depleted along with the health of the planet. It’s high time the industry takes action."
Niklas Ekvall, CEO, AP4 said: “As large investors, pension funds own substantial parts of the global economy and have a stake in maintaining its long-term health and stability. AP4 has identified climate change as the single biggest systematic threat to asset values in the long term, and therefore we have taken action to ensure our investment portfolio supports the low-carbon transition through investment and engagement activities. We hope our ambitious agenda in line with the TCFD recommendations will have an impact and be an inspiration to other investors towards a solution to the global climate challenge that we currently experience”.
Mickaël Hellier, Fonds de Réserve pour les Retraites (FRR) said: “Being recognised as a leader with an AAA rating in the AODP 2018 pensions index reflects the work FRR is doing to address climate change as a long-term material financial risk. We value this report by AODP, which highlights that the industry has a long way to go in accounting for climate change in investments and working to accelerate the transition to a low-carbon economy.”
New York State Comptroller Thomas P. DiNapoli, trustee of the New York State Common Retirement Fund, said: "I am proud that New York state’s pension fund has once again been recognized by AODP as the leading U.S. investor in the battle against climate change. Climate risk poses a major threat to long-term value, but mitigating that risk presents investment opportunities and is key to our decision-making and our engagement with portfolio companies. Global investors are helping build a lower carbon economy, regardless of the current administration in Washington.”
Herman Bril, Director of Investment Management Division at UN Joint Staff Pension Fund, said: “At UNJSPF, we consider ESG factors, including climate-related risks and opportunities, in our investment practices as part of our fiduciary duty toward our beneficiaries. A key part of our approach to sustainable investing is the belief that portfolios which integrate material ESG metrics in their investment process have the potential to provide returns that are superior to those of conventional portfolios, while exhibiting lower risk over the long term.“
ClientEarth pensions lawyer Joanne Etherton said: “Internationally, we’re slowly seeing improvement in pension funds’ responses to climate change. But too many funds, including in the UK, are lagging, and still exposing their pension members to potential and unnecessary investment risk. Climate change should be a standing agenda item for all asset owners and managers. Failure to properly consider and manage the ensuing financial risks may amount to a breach of fiduciary duty; end investors should interrogate this strategy as a serious governance issue. It is time for all pension funds and advisors to finally get to grips with the climate challenge.”
Chris Fox, Senior Director, International Investor Engagement at Ceres, says: “AODP’s research provides a powerful overview of the climate performance of the global pensions industry, and clearly highlights the need for deeper action towards aligning pension investments with the <2C goal. We hope the ranking will be a wake-up call, alerting funds not just to the risks associated with climate change but also the far-reaching opportunities associated with the low-carbon economy.”
This news comes just before hundreds of investors and policy-makers gather in San Francisco for the Global Climate Action Summit where delegates from across the world will make commitments to step up their climate ambitions.
• Over 60% of the world’s largest public pension funds have little or no strategy on climate change, which could put them in danger of breaching their legal duties.
• AP4, Fonds de Réserve pour les Retraites (FRR), New York State Common Retirement Fund (NYSCRF), and ABP come top in a new global pensions ranking on climate, as the three largest UK funds lag relative to the rest of Europe.
• European funds are showing leadership; five funds in each of Sweden and the Netherlands achieved a leading rating.
• California and New York house leading US pension funds, in spite of weak national climate regulation.
• Less than 1% of assets of the world’s largest 100 pension funds are invested in low-carbon solutions, and only 10% of assessed pension funds have a policy to exclude coal from their investment portfolio.
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