Pensions Slow to Move on Climate Risk?

Simon Jessop of Reuters reports, Public pension funds slow to move on climate change risk:

Most of the world’s largest public pension funds are providing little or no information about how climate change will affect the value of their assets, a report by the Asset Owners Disclosure Project (AODP) shows.

The AODP, part of investor pressure group ShareAction, tracked funds with combined assets of more than $11 trillion and found that 63 percent of them were at risk of breaching their duty to savers.

Less than 1 percent of the funds’ assets were invested in low-carbon solutions and only 10 percent of the funds had a policy to exclude coal from their portfolios, the AODP said in its report published on Monday.

The report is the first to assess the funds against the recommendations put forward by the Task Force on Climate Related Disclosures, set up by the Group of 20 Nations’ Financial Stability Board in 2015.

Launching a global ranking to show how funds were performing against the task force’s framework, the AODP said that a number of European schemes scored highly, including Fourth Swedish National Pension Fund (AP4), which manages assets worth about $40 billion.

Niklas Ekvall, chief executive of AP4, said that climate change was the “single biggest systematic threat to asset values in the long term” and that AP4 had moved to ensure its portfolio and engagement supported the move to a low-carbon economy.

“As large investors, pension funds own substantial parts of the global economy and have a stake in maintaining its long-term health and stability,” he said.

You can read the press release from the Asset Owners Disclosure Project’s 2018 ranking of investors’ climate risk management here.

Last week, I went over California's landmark climate change bill going over the report by the Asset Owners Disclosure Project’s 2017 ranking of investors’ climate risk management which is available here. I stated the following:

The table below provides you with the global rankings of pensions (click on image):

Australian and European pensions (especially Dutch) scored well but New York State Common Fund also ranked among the very top pensions when it comes to tackling climate-related financial risks.

The report states: "The world’s first law on mandatory climate disclosure for institutional investors took effect in France, setting a model for other countries."

Curiously, and quite disappointingly, none of Canada's large pension behemoths ranked among the global leaders which makes me wonder if they took part in this survey, and if they did, why didn't they rank well?

At the very least, I'd expect to see OPTrust among global pension leaders when it comes to tackling climate-related financial risk. OPTrust is taking climate change seriously and has taken the lead on with its climate change action plan to measure risks of climate change across its public and private portfolios:

Climate change poses risks across industries, governments and countries. Pension plans such as OPTrust – with their large, global investments – are not immune to these risks.

As a long-term investor, our role at OPTrust is to look decades into the future to identify challenges and opportunities that could affect our members’ retirement security. To ensure plan sustainability, we must better understand the risks climate change poses. The transition to a carbon-neutral economy will be increasingly disruptive and we need to be ready to adapt. Waiting for governments and regulators to act will take too long. The impacts of climate change are already being felt. That is why investors need to build climate risk into their investments, starting now.

We recently issued our Climate Change Action Plan. Among other things, the action plan commits us to determine our exposure to industries, geographies and companies that are most exposed; engage with companies on improved performance on ESG factors; and demand better disclosure of the information investors need to properly price climate change-related risk.

We have already made some progress in our climate-change journey. With our 2017 Funded Status Report, OPTrust became one of the first pension plans to report according to the recommendations of the Task Force on Climate-related Financial Disclosures. We have also issued a white paper calling for a standardised climate change disclosure framework.

Through a G7 initiative and groups such as Climate Action 100+, Canadian investors are working with others around the world to develop common standards and encourage corporations to curb greenhouse-gas emissions.

As a global pension citizen, we believe we must use our voice to influence organisations to better manage climate risk. Currently, 7.6 per cent of the OPTrust portfolio is invested in renewable energy and green real estate. This is our direct investment in the transition to a lower-carbon economy, and these are our guiding principles:

Change happens through influence. Fossil-fuel industries are going to be with us for the foreseeable future.We use our ownership position to promote better practices among our investee companies, which has a far greater impact than divestment. We have engaged 235 companies on climate-related issues, leading to improved climate risk reporting, climate-aware boards and emissions reduction.

Measurement matters. We are focused on developing and using measures and tools that accurately support pricing climate change-related risk.

Market forces can promote sustainability. Our job is to prioritise sustainability by balancing sufficient investment returns with appropriate amounts of risk. We don’t believe regulation will happen soon enough. Market forces will be the more effective means of keeping us adaptable so we can thrive in a changing climate.

Innovation has a role to play. Successful investing requires an emphasis on assessing and understanding a constantly changing environment. We understand the importance of having an innovation mindset and recognise that new technologies will be key in better understanding climate change risks and opportunities. The increasingly rapid pace of change is foundational to how we think about climate change.

Work continues

OPTrust is prepared to face these challenges.

Our approach will evolve over time and the same must happen at other companies for them to adapt to the evolving landscape. Companies must be agile to manage climate risk.

Canada is a global leader in so many respects. We can be even more so by working collaboratively with other global investors to improve understanding of climate-change impacts. One example is to bring together climate scientists and investors for thoughtful debate, to assess and analyse how climate risk exposure affects investment portfolios.

We want our plan members and the broader community to know that addressing climate change constitutes good business and contributes to value creation and plan sustainability.

All of Canada's large pensions take climate change risks seriously which is why they have dedicated teams for Responsible Investing but some take it more seriously than others.

It's also worth noting last week OpTrust put out a press release, Financial institutions launch cutting-edge research project to integrate climate change into strategic investment decisions:

The financial institutions AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME) and Philips Pensioenfonds, supported by Ortec Finance - the provider of investment decision technology and solutions - announce the launch of their climate-savvy Asset Liability Management/Strategic Asset Allocation (ALM/SAA) pilot project.

The goal of the project

The pilot is one of the first efforts of its kind to integrate quantified risks associated with climate change into standard forward-looking financial scenario sets that drive strategic investment decision-making. The pioneering investors involved in the pilot will use these sets to analyze the impacts of various global warming pathways on their ALM/SAA. The pilot is expected to run until the end of 2018. If successful, the climate-savvy scenario set is expected to be made more widely available to investors by early 2019.

Collaborative effort

The pilot project is a broad collaboration between AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME), Philips Pensioenfonds and Ortec Finance, along with Cambridge Econometrics and Carbon Delta. Additionally, I Care & Consult, the Institute for Environmental Studies – VU Amsterdam, the Grantham Research Institute at the London School of Economics, Potsdam Institute for Climate Impact Research, Sustainable Finance Lab, Utrecht University and the University of East Anglia offer their expert feedback in this project.

Approach

The research and development project, which links scientific climate data to ALM/SAA tooling, is a novel approach to mapping potential future climate impacts on investment performance. The methodology of the pilot is to combine existing academic research on climate-related risks associated with several global warming pathways with key macro-economic risk drivers such as growth, inflation and interest rates. Once completed, the results of this mapping will be integrated into Ortec Finance’s forward-looking financial scenario set that already includes a wide array of standard financial and economic variables. Piloting investors’ portfolios will be tested using these new climate-savvy financial scenario sets as the key input for the adjusted ALM/SAA analysis.

Expected results

The resulting insights will increase the piloting investors’ understanding of the sensitivities of their investment strategies to climate-related risks, inform alignment to international climate goals through setting Science Based Targets and enable forward-looking disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures. Additionally, the pilot aims to inform academia of existing knowledge and data gaps to tailor future research to the financial sector practitioners’ needs.


ABOUT OPTRUST

With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

About Ortec Finance

Ortec Finance was created in 2007 through a management buyout of the company ORTEC b.v, which was founded in 1981 by four innovative students of econometrics at the Erasmus University of Rotterdam, who believed mathematical theories and algorithms could be used to optimize the performance of companies. With a team of 250 experts in Rotterdam, Amsterdam, Hong Kong, the United Kingdom, Canada, and Switzerland, Ortec Finance is leading in innovation through strong tie with academic communities, regulators, and practitioners. The company’s long-standing and global client base comprises of leaders in the pensions, sovereign wealth, insurance, asset management, and private wealth management markets. Ortec Finance focuses on providing support for investment decision-making for institutional and private investors. The company designs, builds, and applies solutions for asset-liability management, ex-ante and ex-post risk management, performance measurement and risk attribution, and financial planning.

As I said, some pensions are taking climate change very seriously and they're taking the lead to be at the forefront of measuring and disclosing climate change risk.

This collaborative effort will not only benefit the pensions involved but other pensions and asset managers as well.

Below, an older (2014) clip where Dr John Hewson, the former Chair of the Asset Owners Disclosure Project, at the Festival of Dangerous Ideas in Sydney, Australia, on how your pension is destroying the planet.

I take issue with a lot of his comments, pensions are not destroying the planet but they can do a lot more to measure and disclose their part in addressing climate change risk and the collaborative effort I discuss above is a step in the right direction.