A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://www.pensioenfederatie.nl/website/responsible-investing
https://dwfgroup.com/en/news-and-insights/insights/2024/10/the-role-of-esg-in-pension-investment
https://www.pwc.co.uk/services/human-resource-services/insights/esg-in-pensions-how-can-we-make-a-difference.html
B] The Issue
Pressure is mounting on pension funds to take more account of climate change risks, with campaigners calling on trustees to make sustainable investment decisions and use their voting power to push companies they invest in to go green. They also want governments to consider tighter regulation to force transparency.
The push comes as some big pension funds are already taking more action on climate despite US president Donald Trump’s hostility to ESG, and some companies are backtracking on climate commitments as the Securities and Exchange Commission moves to abandon disclosure requirements.
“Despite the fossil fuel industry’s ongoing attacks on responsible investing, more pension fund leaders are recognising that climate change threatens to destabilise our entire economy. But they must do more to mitigate this enormous risk,” said Allie Lindstrom, senior strategist for sustainable finance at the Sierra Club.
C] The Details: USA versus Canada
Few US public pensions adequately use their voting power to mitigate climate risks and protect their members’ returns, according to a report from Sierra Club and Stand.earth which analysed proxy voting records of 32 public pension funds. “To ensure they can meet their obligations to protect retirees’ hard-earned money for decades to come, pensions must strengthen their proxy voting strategies to hold corporate polluters accountable and support climate progress,” said Lindstrom.
Meanwhile in Canada, 11 of the country’s largest pension fund managers, which manage US$2.4tn in retirement savings, have all acknowledged that climate change poses significant risks for their investments, according to Shift, an initiative that works to protect pensions and the climate. “If the political wind is indeed shifting, the directors and executives of Canada’s largest pension managers must lean into this wind,” the Shift report said.
“Canada’s pension leaders have been working to develop the internal capacity necessary to make clear-eyed, long-term decisions on climate. This leadership is urgently needed in the current political and economic landscape.”
D] Pension fund shifts could lead to stranded fossil fuel assets
US and Canadian pension fund returns could fall up to 50% by 2040 if predictions for the worst global warming materialise and if the current approach to climate policy doesn’t change, according to Ortec. It predicts that returns for UK pension funds could fall by up to 30% by 2050, while Swiss and Dutch pension funds are also comparatively less affected due to their lower geographical exposure to extreme climate events and bigger allocations to less vulnerable assets.
Doruk Onal of Ortec said a shift to more low-carbon policies and net-zero targets could accelerate the stranding of fossil fuel assets, potentially triggering market overreactions and disruption. “The decline in investment returns has serious implications. For pensioners, reduced returns could lead to lower retirement benefits and financial insecurity. Sponsors, including corporations and government bodies, might face increased contributions to cover shortfalls, impacting their financial health,” he said.
In the UK, responsible investment group ShareAction has been working with the pension industry to help amend the law on fiduciary duty so trustees can take into account ESG factors when making investment decisions. “It should clarify the law and enable pension trustees to take decisions that fully incorporate environmental and social factors and minimize the risk of legal action,” said Claire Brinn of ShareAction.
“Pension funds might be unknowingly investing in things that pose real risk for the future performance of their funds and for the world into which we retire. It can’t make financial sense to be investing in stuff that will ruin our economy and ruin our planet.”
E] Projections
Brinn noted that pension funds are particularly exposed to corporate bond markets. Over half of carbon-intensive debt is set to mature before the end of this decade, with global fixed income markets needing to refinance approximately $600bn each year, according to a report last year from the London Stock Exchange.
Climate change disclosures are good risk management for pension funds. The Make My Money Matter campaign says that £88bn of UK pension savers’ money is invested in fossil fuels, but the industry could invest £1.2tnn into renewable energy and climate solutions by 2035. “We’re underestimating the potential economic impact of climate risk,” said Huw Davies of Make My Money Matter.
Davies noted that the latest report from the Institute and Faculty of Actuaries states that the global economy could face a 50% loss in GDP between 2070 and 2090, unless immediate policy action on risks posed by the climate crisis is taken. A review last year by the UK’s Pensions Regulator (TPR) of climate-related disclosures by pension trustees found that more than 60% of reports had some form of net-zero goal with a target date of 2050 or earlier.
“Climate change disclosures should be the product of good risk management,” said Mark Hill, TPR’s climate and sustainability lead. Davies noted that two-thirds of UK pension holders support their funds investing in renewables. “People want their pensions to make a financial return but they also don’t want their money to be doing harm … there’s definitely an important role for the public to apply pressure and there’s also an important role for employers to apply that pressure and demand better pensions.”
F] Finally
“A lot of these pension providers have robust net-zero targets but they continue to support companies that are causing harm and aren’t aligned to those goals at all,” Davies said. “We see plenty of examples of weak stewardship from them when you look at their voting records at oil and gas companies.”
In February, leading asset owners from across the UK, Europe, Australia and the US – led by The People’s Pension, Brunel Pension Partnership, and Scottish Widows – issued a statement on climate stewardship to define clear expectations around how asset managers should mitigate climate-related risks.
“Asset managers face growing fiduciary risks from climate-related impacts and must strengthen their stewardship efforts to mitigate these risks,” the statement said. The People’s Pension – one of the UK’s largest pension funds – this week pulled more than $25bn of investments from State Street over sustainability and ESG concerns, passing funds to Amundi & Invesco instead.