Pension funds failing to manage climate risk could get sued

Some 85% of major asset owners are doing little or nothing to cut carbon, AODP reveals, as it prepares to take legal action

What will oil companies be worth when you get old? (Pic: Flickr/Ed Yourdon)

What will oil companies be worth when you get old? (Pic: Flickr/Ed Yourdon)

By Megan Darby

Nine leading pension funds are cutting the carbon footprints of their investments in line with global efforts to curb climate change.

Yet 85% of the world’s 500 biggest asset owners – of which the majority are pension providers – have done little or nothing to address climate risk.

That was revealed in the third annual Asset Owners Disclosure Project (AODP) index on Monday, a survey of funds worth US$40 trillion.

If funds refuse to engage with these risks, AODP and Client Earth are preparing to help pension holders take legal action.

“At the top of the table, there are some really positive stories to be told,” says Julian Poulter, CEO of the AODP.

Australia’s Local Government Super, Norway’s KLP and the US CalPERS performed best. ABP and PZW of the Netherlands, the UK Environment Agency Pension Fund, New York State Common Retirement Fund, Australian Super and Sweden’s AP4 also achieved the maximum AAA rating.

Blog: A 7-step plan to avoid stranding your fossil fuel assets

Their portfolios may not yet be compatible with the international goal of limiting warming to 2C, Poulter says, but they are moving in the right direction.

At the bottom, investors “fail to use some of the basic judgement needed to assess climate risk”.

Only 7% of asset owners surveyed for AODP’s index even had the ability to calculate their carbon footprints. Just 1.4% had cut their carbon intensity in the past year and 2% planned to do so next year.

It means the retirement pots for millions of people remain heavily invested in fossil fuels, which will lead to catastrophic climate change if fully exploited.

In the event of effective climate action, on the other hand, those assets will lose value, dashing prospects of a comfortable old age.

Pension providers, insurers and sovereign wealth funds have the cash to drive a low carbon transition (Compiled by AODP in 2012 from STEM 2006)

Pension providers, insurers and sovereign wealth funds have the cash to drive a low carbon transition (Compiled by AODP in 2012 from STEM 2006)

Left unchallenged, the sector is headed for a shock similar to the sub-prime mortgage crisis, Poulter says. “We think it is a near certainty that that scenario will be replicated with climate change.”

Pension funds have legal duties to assess and manage material financial risks, so their members can rely on a regular income in their later years.

AODP and Client Earth have launched an initiative to identify where pension funds are neglecting those duties when it comes to climate risk.

They will engage with laggards first, explains Client Earth barrister Elspeth Owens. If pension funds do not come up to scratch, the NGOs will take them to court.

They are working within English law, which the AODP index would suggest gives plenty of targets to choose from.

Twelve UK pension schemes received the lowest possible X rating, including Tesco, Rolls Royce and the UK Parliament. Another fifteen scored a D, including the BBC, Unilever and Royal Mail schemes.

Several other jurisdictions are based on the English legal system, Owens says, so a test case could have global repercussions.

‘Disturbing picture’

Australian think-tank the Climate Institute, which worked with the AODP on the index, praises the two local funds to get AAA ratings.

“But overall the index this year paints a disturbing picture of the inadequate management of climate risks to Australians’ retirement nest eggs,” says CEO John Connor.

“Top rated funds protect their investments by engaging with the companies they own, divesting of heavily carbon-exposed assets, or deploying hedging strategies. Leaders are accelerating their efforts.

“Meanwhile, the laggards seem ignorant of climate risks as well as risks that high carbon investments will be left stranded, or made worthless, by cleaner technologies, pollution controls or changes in consumption.”

The ratio of high to low carbon investments across all 500 funds examined is 20:1, notes AODP chair John Hewson – a “bet on denial or inaction”.

He adds: “Too many Australian and global asset owners are risking either accelerating climate change by investing in heavily carbon-exposed assets, or being caught out by changing technologies and policies.”

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