Opining for the World Economic Forum, economist with the World Wildlife Fund’s (WWF) European policy office said there’s not enough awareness of how pension funds invest.
Sébastien Godinot explained: “What we spend money on has consequences. But while we are usually aware of what our own capital is used for, how about the money we put into pension funds, or to insurance companies?
“There are few requirements for pension funds and insurance companies - known as ‘asset owners’ - to reveal what they are investing in. And there is no obligation for them to ensure their investments are in sustainable sectors either.”
This could mean pension funds could be investing in coal, something he called a “highly polluting energy source and a slowing industry”, without users even knowing it.
“We believe that asset owners have a crucial contribution to make towards the Paris Agreement’s climate targets - keeping global temperature rise to well under 2 degrees and aiming for 1.5 degrees.
“After all, while climate change is primarily a terrible threat to our existence, it is also a major financial risk; USD7.2 trillion could be lost in value from financial portfolios globally by 2100 if no further action is undertaken on climate change,” added Mr Godinot.
Should asset owners, like pension funds, disclose all their investments?
The WWF economist said that asset owners should think about investing in renewable energy and the “green economy”, as opposed to sectors that have negative ties to climate change, like fossil fuel extraction.
Continuing, he argued that as growing industries with falling prices and consistent returns, wind and solar “offer a huge investment opportunity”.
However, Mr Godinot acknowledged that funds are already beginning to move away from polluters.
“Earlier this year, WWF published research based on data from 29 of Europe’s major asset owners, mainly pension funds. We found that nearly all of them had cut public equity funding to coal mining. However many of them were still investing in coal power and not focusing enough on the potential of renewable energy,” he said.
Nevertheless: “Those findings were only a fraction of the whole picture. We actually approached over 80 asset owners, many of whom agreed to test whether their investments are compatible with a scenario that keeps temperature rise below 2 degrees, as per the Paris Agreement.
“However, they were not obliged to disclose the results - and it’s this lack of mandatory disclosure that makes it challenging to hold asset owners accountable for their investments.”
Transparency is the first step in “bringing asset owners in line” with the Paris agreement. With this in mind, Mr Godinot said the EU should require that investors assess and publish how they align with the goals.
“Of course, asset owners can - and should - also lead the way, by assessing their climate alignment on a voluntary basis and disclosing the findings.
“Aligning investments with the Paris Agreement, studies show, is the best way for asset owners to safeguard the money and interests of their members and beneficiaries - over time, this is the surest way to better returns. Asset owners should acknowledge this officially and act upon it,” he said.
Mr Godinot called on asset owners to develop tools to create, align with and track the achievement of climate science-based targets and for shareholders to “push companies in their portfolio to adopt strategies in line with the Paris Agreement”.
“Doing all of this will help fight climate change and protect us from future climate-related costs, but it will also guarantee a better and safer return on investment.”