• 87% of assets managed by the world’s largest public pension funds yet to undergo formal climate risk assessment.
  • Risks associated with fossil fuel dependent investments are the most commonly identified climate-related risk, however only 15% of pension funds analysed have developed a coal exclusion policy.
  • Around half of pension funds are undertaking some form of climate-related company engagement, but this largely focuses on improving disclosure instead of action.
  • Only 10% of pension funds have made a formal commitment to align their portfolios with the goals of the Paris Agreement.
  • Almost a fifth of pension funds have performed climate scenario analysis in their investment portfolios.

The Asset Owners Disclosure Project (AODP) today 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.”

Notes to editors:

  • For more information, please contact Beau O’Sullivan at beau.osullivan@shareaction.org or +44203 475 7859
  • This report is the third in the report series. See previous reports here.
  • AODP selected the world’s 100 largest pension funds for inclusion in this study. The assessment scope was determined using the list published by P&I/ Willis Towers Watson 300 analysis (September 2017). For this reason, funds that were ranked in 2017 now fall outside the scope of the survey. The assessment is based on direct and public climate disclosures released no later than July 2018.
  • AODP makes a number of recommendations to industry players:
    For regulators – clarify trustees’ duties in respect of managing climate change as a material financial risk
    For pension fund members – challenge your pension fund to make a pledge to align its investment portfolio with the goals of the Paris Agreement
    For funds and trustees – improve assessment of climate-related risks across the investment portfolio; and escalate engagement with investee companies on climate-related topics
  • The financial risks of climate change refers to assets losing their value across the investment portfolio due to (i) emerging regulation to curb global temperature increases and (ii) growing competition from low-carbon energy sources. For example, over 80% of the world’s coal reserves are expected to be “unburnable” (or “stranded”) if we are to stay within the 2C warming limit. The physical impacts of climate change (such as extreme weather events) pose risks to investment assets such as property, agriculture and infrastructure.
  • About AODP: The Asset Owners Disclosure Project (AODP), part of ShareAction, rates and ranks the world’s largest institutional investors and assesses their response to climate-related risks and opportunities. The ratings are made public, providing much-needed transparency for beneficiaries, clients, investors and stakeholders, and emphasised through advocacy and direct engagement to drive change. As the only comprehensive, climate-specific, independent, non-self-selective assessment, AODP prides itself on being the world’s benchmark of climate leadership in the investment system.
  • ShareAction’s vision is a world where ordinary savers and institutional investors work together to ensure our communities and environment are safe and sustainable for all. Our mission is to unleash the positive potential of the mainstream investment system. To do this: We’re building a movement for change in our investment system by working with people inside and outside the industry to challenge the status quo; We’re unlocking the positive potential of the investment system by working with large and small investors to change unsustainable corporate practices; We’re reforming the investment system by advocating for change in the policies, governance, and incentives that drive behaviours in the investment industry.