Earlier in the month we were excited to launch our second AODP survey in 2018, shining our spotlight on the largest global public pension funds. We assessed pension funds representing over $11 trillion in assets under management (AUM), holding immense power, influence and responsibility over corporate behaviour. As with any survey there are leaders – namely AP4, Fonds de Réserve pour les Retraites, New York State Common Retirement Fund, and ABP – and laggards. But the survey did more than just provide a ranking of how these influential but often low-profile organisations were responding to climate change. It also provided detail of how these asset owners’ governance systems, risk management processes, and asset allocation decisions were responding and adapting to the challenges posed by climate change and its implications.

The second part of this report, launched this morning, uses AODP survey data to explore the performance of the world’s largest pension funds on the governance of climate-related risks and opportunities, and communication with savers. We saw some mixed results.

On the positive side, around a quarter of the largest pension funds indicate that they have a fiduciary duty to consider climate risk in their investment decisions with 11 having released public statements outlining their approach.

A failure to act with urgency on climate change is a failure on your fiduciary duty

– Al Gore, PRI in Person event in San Francisco, September 2018

Despite the Paris Agreement, an emerging global consensus around the TCFD recommendations, and rising climate volatility, some of the most striking findings were around the lack of action on climate change by leading funds. A large majority (68%) of the world’s largest pension funds do not yet seem to recognise climate change as a material risk.

Given the lack of public recognition that climate change is a material issue, the second disappointing finding should come as no surprise. The majority of pension funds surveyed lack a basic climate governance structure. For example, only a third of non-executive boards have discussed their fund’s strategy on climate change.

Table showing % climate expertise on pension boards

On the Task Force for Climate Disclosure (TCFD) the picture is also disappointing. As part of last week’s Climate Week the TCFD announced it had reached a milestone exceeding 500 supporters including large corporations, trade bodies and some leading financial institutions. Though some of the asset owners we surveyed are included in that list, they remain in the minority of TCFD supporters. Furthermore, our research finds that less than 20% of funds undertake or intend to undertake TCFD-aligned reporting.

table showing % funds reporting with TCFD

The survey also collated some qualitative feedback on some of the issues these pension funds perceived around the implementation of the TCFD recommendations.

The most commonly identified challenge among respondents was around scenario analysis, specifically on a lack of clarity over how asset owners should factor
various climate scenarios into their investment approaches. Lack of reliable data was another common issue. These key themes were also common challenges found in AODP’s recent report ‘Winning Strategies’.

Based on our findings, AODP has put together key recommendations for regulators, savers and trustees, which we hope can provide the impetus for pushing pension funds towards better governance and communication of climate-related risks and opportunities. A summary of these can be seen below.

• FOR REGULATORS – Introduce mandatory climate disclosure and provide clearer guidance on fiduciary duty and climate-related risk
• FOR MEMBERS/BENEFICIARIES – Encourage funds to clearly communicate climate-related risks and opportunities
• FOR PENSION FUND TRUSTEES – Ensure climate governance is fit for purpose

Though some of the largest pension funds are showing real leadership – the vast majority of these organisations are sadly yet to communicate clearly with savers on climate change and have failed to build basic climate governance systems to ensure these issues are integrated into decision-making throughout their organisations.

Click here to view part II of the report