Pension Funds: The Imperative of Climate Change Assessment

The global pension fund industry controls trillions of dollars. In the United States alone, pension fund assets under management equal $9 trillion. These assets are vulnerable to at least three major categories of climate-related risk: climate impact risks, carbon-constrained demand risks, and climate liability risks.

The first category of risk comprises those that are readily apparent from climate change impacts, such as the physical risks that have a material effect on the pension fund assets. The physical risks are both chronic and acute and can include climate change impacts from changing weather patterns, sea-level rise, temperature extremes, and changes in water availability or other natural resources. Moreover, in a future with 6°C of warming, these physical risks represent present value losses worth US$43 trillion according to the Economist Intelligence Unit. To put this in perspective, the current market capitalization of all the world’s stock markets is only US$70 trillion.

The second category of risk to pension fund assets comprises those that arise from the constrained demand for fossil fuel products as the global community shifts to fulfill the international community’s pledge to limit global warming to 2°C. This shift towards the 2°C limit means that fossil fuel assets permanently change from supply-constrained scarce commodities to demand-constrained perishable commodities. As Deutsche Bank spelled out, “oil left in the ground means a big chunk of the industry’s current net asset value goes with it.” Carbon asset risks expose pension fund investments to rapid value depreciation. Indeed, Citibank recently stated that “$100 trillion of assets could be ‘carbon stranded’, if not already economically so.”

The third category of risk is the risk of liability. The liability risk to investments in the fossil fuel industry primarily arises from evolving interpretations of fiduciary and tortious duties of care. Namely, there are two types of litigation that could lead to significant financial liabilities: (1) direct claims for damage caused by climate change; and (2) financial claims for damage caused to beneficiary, shareholder, or consumer assets.

The above climate-related risks to pension fund assets and plans have legal implications for pension fund fiduciaries, in their duties of loyalty, care, and prudence for the well-being of beneficiaries. CIEL works to educate pension fund fiduciaries on their duties to consider climate change when allocating fund assets and on the importance of moving their assets towards a sustainable portfolio. Pension funds can play an important role in the capital market shift towards a global decarbonized economy.

In Norway, CIEL contributed to the broad movement calling on the country’s $890 billion government pension fund to decarbonize. Through multiple submissions, CIEL advised the fund to divest from all fossil fuels, with coal as an immediate priority. In June 2015, Norway’s parliament voted to divest from coal, though other fossil fuels remain in its portfolio. The global pension fund industry must follow Norway’s lead and move towards a decarbonized economy to protect both pension fund beneficiaries and the planet.