Pension Funds – Practitioner Plenary Session @ FINEXUS Conference

Time and Venue: Thu, 18 Jan 2018, 09:00 – 10:00. Aula KOL-G-201, Univ. of Zurich
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Summary. Pension funds are considered to be among the financial actors with a long-term time horizon for their investments. Therefore, they start to become concerned with climate-related risks. The session examines challenges and opportunities to mainstream climate risk and impact metrics within pension funds. In particular, the aim is to discuss the lessons learnt from two surveys (on Swiss and European level) about the incentives of the pension funds to invest in 2°C and barriers they face. Also, the session will discuss a recent voluntary initiative among Swiss pension funds to evaluate the alignment of their portfolios to the 2°C target, in order to understand to what extent this kind of exercise could be extended to other countries and financial industries.

Panelclick here for speaker biographies:

  Carlo Jaeger (Professor, Global Climate Forum)
  Silvia Ruprecht-Martignoli (Senior Policy Advisor, Swiss Federal Office for the Environment)
  Stanislas Dupré (Global Director, 2 Degrees Investing Initiative)
Amandine Favier (Senior Advisor Sustainable Finance, WWF)
Patrick Uelfeti (Portfolio Manager, Publica)

Background and policy context.
Although, Switzerland contributes only to a 0.1% of the global emissions, the country is “among the hardest hit victims” of global warming. The action to stop this influence was taken by the Swiss government when in June 2017, the Paris Agreement has been ratified in Switzerland. The president of Switzerland, Doris Leuthard, announced the targets for Swiss GHG emissions reduction: the aim is “to reduce CO2 output by 50% compared with 1990 levels” . It was also announced that this goal not only requires actions from the government but also it needs the support of the financial system. Taking into account that a transition to a low-carbon economy is a long-term commitment, market players with a long-term time horizon for their investments, in particular, pension funds started to recognize the importance of assessment of low-carbon transition related risks.
The assessment of the climate change-related risks for the pension funds has recently emerged in the policy discussion. In 2016, WWF and shareaction carried out the first independent study of Swiss pension funds and Responsible Investment (RI). This study have shown that the majority of the participating pension funds have already started to engage with the topic of responsible investment on some level. WWF also provided recommendations on how investors can align their portfolio with the Paris Agreement. Among others, recommendations include the assessment of climate-related financial risks and opportunities, disclosure of asset owners’ climate risk exposure and the climate alignment of their portfolio (see also HLEG report), forceful engagement with portfolio companies to ensure that they publish 2°C transition plans and climate science-based targets, and delivering of TCFD-aligned reporting. Other studies, analyzing exposures of the European pension funds have shown that pension funds are exposed to shocks on fossil-fuel industry as well as to carbon-intensive assets, since they have large portions of their asset invested in equity and bonds in these sectors. Moreover, since European pension funds have around ⅓ of their assets invested in investment funds, they also have indirect exposures to climate policy relevant sectors, which are not immediately visible from the balance sheets and require to look at the investment chains [Battiston ea. 2017, Stolbova ea. 2018 working paper]. This rose awareness of the importance of assessment of climate-related risks and the need for adaptation strategies for the pension funds.

Role of pension funds in the transition to a low-carbon economy.
There is also an important debate concerning the role of the pension funds in the transition to a low-carbon economy. On the one hand, pension funds could significantly contribute to the transition by channeling the funds into renewable energy products and other climate-compatible technologies. On the other hand, they are obliged to invest money in the most profitable way possible, and therefore, prefer less risky investments. While some financial institutions, like investment funds or asset managers have more opportunities to invest in low-carbon products, pension funds are facing more restrictions in their investment opportunities.

Tools available to the pension funds to assess their 2°C alignment.
One important factor affecting the pension funds’ position on climate-related investments is governmental concerns. Although, no universal and binding legislations exist for pension funds worldwide yet, some countries began to introduce basic infrastructure to facilitate the sustainability assessment of pension funds. One recent example of such an initiative is an assessment initiated by Swiss Federal Office for the Environment (FOEN) and the State Secretariat for International Financial Matters (SIF), which proposed to the pension funds and insurance companies to assess their alignment with the 2°C climate goal on a voluntary basis. As it was announced by the Federal Office for the Environment of (OEN/BAFU): “In 2017, the FOEN and the SIF initiated pilot tests to analyse the climate alignment of financial portfolios. All Swiss pension funds and insurance companies could voluntarily have their portfolios of stocks and corporate bonds tested, anonymously and free of charge, for their compatibility with the 2°C target. The pension fund association ASIP and the Swiss Insurance Association SVV supported the tests carried out by the Think Tank 2°Investing Initiative.” , . This initiative resulted in a report under the framework of open-source Paris Agreement Capital Transition Assessment (PACTA) model, that concluded that the financial flows underlying the corporate bonds and listed equity portfolios of Swiss pension funds are currently supporting a 4-6°C pathway rather than the internationally agreed 2°C pathway. This is a worrying sign that shows that actions need to be taken to align the portfolios of the pension funds with 2°C. The current position of governmental organizations shows that it is in the interest of pension funds to proceed with estimation of climate-related risks, while governmental organizations’ role, such as Federal Office for the Environment (FOEN/BAFU), is to provide appropriate tools for the pension funds so they can measure their alignment with 2°C on a regularly basis and adjust their portfolios accordingly. At the moment, no further regulations for the pension funds are planned to foster this alignment, the Swiss government proposes in his revision of the CO2-Act after 2020 to implement the objective of the Paris Agreement by voluntary measures of the market actors. On the European level, some actions have already been taken to assess the exposure of the EU pension funds to climate change transition risks: “EU pension funds will have to include environmental risks in their investment strategies” that should “encourage money to flow out of fossil fuels and into greener sectors.”

Obstacles for the pension funds to invest sustainably.
On the other hand, the incentives for pension funds do not seem to be big enough yet to move towards low-carbon investments. In addition, there are several reasons why pension funds tend to behave cautiously regarding fossil-fuel divestment. The first reason is a fear of high cost of the “going green”, as there is believe that green investment tools tend to be more costly. The second reason is the fact that green investments are considered to be more risky. The third reason is a lack of information about the assessment of the costs of investing in renewable energy. In particular, smaller sized pension funds might not have the capacity to carry out their own sustainability research and assessment of firms. Last but not least, at the moment, not all pension funds are obliged to invest sustainably. Very few governments have incorporated sustainability into pension funds’ fiduciary duty and, together with the fact that pension funds have to provide high and guaranteed returns, it does not incentivise them to invest actively and sustainably. On the contrary, most of the pension funds act as a passive and conservative investor and they are reluctant to take up a proactive approach.

Measures taken by pension funds.
Although, many pension funds do not comment on their exposure to climate transition risks , some of them take an active role in the assessment of their exposure and also take measures accordingly to stay below 2°C. For example, PUBLICA assessed the potential impact of it’s portfolio on three levels: the institutional framework (“COP21”), the macro level (supply and demand), and the micro level (companies and CO2 sensitivities). This analysis has also found that “coal-producing companies are less adaptable in their business models and therefore more affected by the possible taxation of carbon emissions” and that ” a collapse in oil prices is unlikely and consequently there is no immediate prospect of a substantial decline in the value of reserves”.

Aims and scope of the session.
This session will discuss the results of surveys carried out by WWF as well as the climate alignment test for all Swiss pension funds and insurances by the Swiss Federal Office for the Environmental in collaboration with 2°Investing Initiative that aimed to assess the alignment of the pension funds with 2°C scenario. Also, the position of a pension fund “Publica” will be discussed in light of these tests.

The SIMPOL Project is currently funded by the H2020 European grant DOLFINS (no. 640772) in the Global Systems Science area of the Future Emerging Technologies program.