COP26: Pension funds must join the fight
In the lead up to COP26, regulators are likely to raise the pressure on pension funds to join the fight against climate change, Amundi Asset Management says in a new report.
Pension funds held over USD $35 trillion of assets worldwide at the end of 2020, according to the Organisation for Economic Co-operation and Development (OECD). Given their prominent role in the global economy, they are increasingly expected to incorporate environmental considerations into their investment decisions.
“This seems to be based on the realisation that accounting for all kinds of risks – including climate change and social risks – is a crucial part of pension funds’ fiduciary duty, given their long-term investment horizon,” says Sofia Santarsiero, Business Solutions and Innovation Analyst at Amundi Asset Management.
Regulators in the UK and Europe are already starting to adopt this mindset, Santarsiero says. Furthermore, authorities in other markets are expected to follow suit.
In 2019, South African shareholder activism organisation Just Share told major pension funds in the country that they had a legal obligation to consider climate-related risks when investing.
Just Share and ClientEarth commissioned a legal opinion from Fasken on whether the boards of pension or provident funds are required by law to consider climate risks. “The legal opinion is unequivocal in finding that they are required to”, Just Share said at the time.
Developed markets lead the way
The UK aims to become the first major economy where all pension schemes report on the financial risks of climate change in their portfolios.
In the next few months, Parliament will discuss The Pension Schemes Bill. It includes new requirements for larger schemes and master trusts to align their governance processes and disclosures with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Meanwhile, The European Commission has highlighted the importance of aligning pension funds’ financial flows with the objectives of the European Green Deal. This will likely broaden the concept of fiduciary duty towards beneficiaries.
Also, the new US administration appears intent to roll back rules that discouraged pension funds from taking environmental risks into account.
Santarsiero says that the US Department of Labor is expected to issue new regulations explicitly allowing pension plan fiduciaries to consider environmental, social and governance (ESG) factors.
At the states level, regulations differ broadly. At one end, Illinois passed a law in 2019 requiring all public institutions to have sustainable investment policies in place and to consider ESG factors in the investment decision process. On the other hand, Texas prohibits retirement plans from investing in companies that boycott energy companies.
“Pension funds have started their journey towards greater integration of climate change considerations within their investments, but undoubtedly there is still a long way to go”, says Sandrine Rougeron, Global Head of Corporates and Corporate Pension Funds Clients at Amundi.
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