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All Hands on Deck as Pensions Tackle Climate Change

What are you doing to future-proof your pension?

Whether you are running a pension plan, consulting to a pension plan, or putting your retirement savings into a pension plan, you want those funds to be healthy and secure. That means proactively engaging with the significant impacts of climate change on our physical world and our economy.  

Pension plans have a legal duty to consider climate change

A new legal opinion written by Randy Bauslaugh of McCarthy Tetrault for the Canada Climate Law Initiative provides a clear overview of the duties of pension plan fiduciaries to track and understand these developments. Bauslaugh contends that given the consensus evidence of the financial materiality of climate-related risks and opportunities, plan fiduciaries ignore these issues at their peril. Climate change is fueling major shifts in economic behavior as net-zero plans and low-carbon energy solutions accelerate. Investments that were a sure bet a few years ago may not be as secure in the new economy. Climate change could also spur more innovation and technological advances than we have seen since post-World War II, opening up tremendous investment opportunities. 

Bauslaugh warns we may see claims arise for authorizing or permitting investments without properly addressing climate risks, or for failing to consider climate risks and opportunities when establishing investment policies. Plan fiduciaries may even find themselves held personally liable for financial and reputational losses resulting from that failure.

While plan administrators clearly need to ensure their plans are taking climate into account, this is not just an issue for fiduciaries. To fully address climate change impacts, there are a number of roles to be filled. This range includes pension committee oversight, investment manager strategy and due diligence, and plan member advocacy.  

Below is a review of some recent actions taken by pension stakeholders to ensure their plans are climate-conscious and future-proof. 

Pension investors tackle climate change

There is growing recognition that climate change is a significant investment risk for asset owners. An international group of institutional investors with US$6.6 trillion of assets, including several large pension funds, have joined the UN-convened Net-Zero Asset Owner Alliance. These signatories have stated that investment portfolios must be transitioned to net-zero emissions by 2050 in order to meet their fiduciary duties to manage risk and achieve target returns. 

Indeed, many pensions globally are adding net-zero targets to their investment strategies. New York State’s US$226 billion pension fund set a goal to achieve net-zero carbon emissions by 2040. Nordea Life & Pension is requiring its asset managers to commit to net-zero targets that are in line with the Paris Agreement by 2024. IFM Investors (owned by 27 pension funds in Australia) has set a net-zero by 2050 target, as has the Ontario Teachers’ Pension Plan (OTPP) and the Caisse de dépôt et placement du Québec.

Some plans are measuring and disclosing the carbon footprints of their portfolios. Plans are also developing strategies for climate-related engagements with investee companies and implementing exclusion policies for investments in high-emitting sectors. See for example, recent commitments made by the University of Waterloo pension plan, the UK’s National Employment Savings Trust, and the California State Teachers’ Retirement System.

Plan members call for climate action

Plan members, as the beneficiaries of pensions, are increasingly raising climate concerns with their employers. In some cases, the ask is for greater transparency about the climate considerations being taken into account. Others are demanding particular decarbonization actions with two main goals in mind: 1) protecting their retirement savings against potentially devastating impacts of climate change and 2) ensuring their retirement dollars are helping to accelerate the transition to a low-carbon economy.

The advocacy organization Shift has been running a campaign to encourage the OTPP to take stronger action on the climate crisis. This includes helping teachers understand how their pensions are invested and supporting teachers as they engage with the fund to 1) improve disclosures, 2) phase out fossil fuel investing, and 3) invest in more companies committed to net-zero. The OTPP has made some recent climate announcements but Shift continues to press for interim details about how the plan expects to achieve its climate goals.

Plan member activism recently made it to the courts. A member of a pension plan in Australia sued the fiduciaries of the plan for failing to adequately consider the risks of climate change while managing investments. Although the case was settled out of court in late 2020, it is a significant development because the trustees agreed to align the pension fund’s portfolio with net-zero by 2050 and to start reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

By engaging with plan members about investment strategies related to climate change, funds can receive feedback and support from members and possibly avoid reputational risks and legal disputes. 

Pension investors and policy-makers push for climate-related disclosures

Investors managing assets for pensions are seeking more information about climate resilience from portfolio companies. For example, Canada’s eight largest pension funds recently made a joint request for corporations to improve their disclosures and recommended data be reported in accordance with the Sustainability Accounting Standards Board and the TCFD. Better climate disclosures by investee companies will help inform pension investors’ research and can help pensions decide when and where to focus their engagement efforts. 

In some jurisdictions, reporting climate information is becoming mandatory not just for issuers but for pensions too. The UK government is the first to roll out regulations that obligate pension trustees to evaluate and disclose their risks and opportunities presented by climate change. As TCFD reporting gains steam globally, it could become an industry standard for pensions in many countries.

Climate-conscious pensions look to the future

Climate change has the potential to have devastating impacts on our economy which puts our pensions at risk if we are not paying attention. At the same time, our retirement savings have power. Pension funds are big enough to influence global markets and accelerate the transition to a low-carbon economy. Although there is much more to be learned, many pension stakeholders are becoming leaders in climate-conscious investing. 

As we save for retirement, there are a number of steps we can take to protect our future. 

  • If you are a plan trustee or a member of a pension committee, be sure to read Bauslaugh’s opinion. Understand the risks and opportunities for your plan and for you personally. Bauslaugh details particular actions you can take such as addressing climate change in your investment policies and engagement strategies, maintaining appropriate minutes when material decisions are made, and staying informed of climate-related developments.

  • If you are a consultant for pension plans, be ready to support your clients as they tackle the unique challenges of climate change. Your clients need climate information and tools to help them adjust investment policies, measure their carbon footprints, and set net-zero goals.

  • If you are a plan member, find out how your savings are invested. Ask ‘how climate-conscious is my pension?’ Consider whether your plan fiduciaries are doing enough to protect your retirement security from climate change risks and if they are taking advantage of new opportunities as we shift to a low-carbon economy.  

How Manifest Climate can help 

Manifest Climate regularly works with pensions, helping key stakeholders understand climate risks and opportunities. We provide guidance to clients who are developing credible net-zero plans and our SaaS platform provides investors with insights into the climate actions and disclosures of their portfolio companies. Contact us today.