Trillion Dollar Transformation: Climate Risk Must Inform Pension Investment Decisions

By Steven Feit, Staff Attorney
By Steven Feit, Staff Attorney

In order to meet stated climate goals, tremendous capital must be shifted from investments in fossil fuels to renewable energy and other clean assets. The divestment movement, which urges investors to eliminate their holdings in fossil fuels, now has over $3.4 trillion in assets under management pledged to divestment.

The divestment movement began with an ethical case, but as attitudes changed, public policy shifted and markets evolved, neutral observers – including some of the largest financial institutions in the world – began issuing financial warnings. Fossil fuels were no longer fundamentally sound in the way most believed. In fact, some warned, the risks of asset stranding and global action to limit carbon emissions would lead to massive devaluations of fossil fuel assets and companies. Divestment was no longer merely an ethical stance, but now a financial imperative.

The cacophony of voices warning of the financial risks to the fossil fuel industry is growing louder by the day. Citigroup, Goldman Sachs, BlackRock, HSBC, Deutsche Bank, Barclays, the Bank of England, and Mercer, just to name a few. Amalgamated Bank and AXA, an insurer, have already begun the process of divesting from fossil fuels themselves. It is no longer reasonable for investors to ignore the reality of climate change and the financial risk it poses.

A new report by CIEL released last week called Trillion Dollar Transformation adds to the growing list of warnings indicating that the divestment movement has entered its third phase. Divestment is no longer just an ethical stance or a financial position – it now may be a legal responsibility. Pension funds, which are among the most risk-averse actors in the financial marketplace, must take the lead on protecting their beneficiaries from the financial risks posed by climate change, effects which will be concentrated most heavily in carbon intensive activities.

Building off of a companion report from Mercer Investment Consulting, which describes the financial risk of climate change to pensions, which face longer time horizons, CIEL’s analysis outlines the fiduciary duties pension fund trustees owe to their beneficiaries and demonstrates how climate change implicates these duties. It concludes that pension fund fiduciaries owe a duty to consider the climate risk in their portfolios, recommending adopting new investment principles as well as divestment, rebalancing, and engagement as possible solutions. This report adds to the growing list of warnings urging investors to move their capital away from fossil fuels and into low carbon technologies and sustainable infrastructure.

The situation today feels reminiscent of the court case The T.J. Hooper. In 1932, a tugboat operator lost two barges in a storm. The owner of the cargo sued, claiming that the operator should have had radios on board the tugboats, which then could have received weather reports. The tugboat operator argued that because it was not standard industry practice to use radios to receive weather reports, he was not negligent for failing to do so. Judge Learned Hand, however, disagreed. “There are precautions so imperative that even their universal disregard will not excuse their omission.”

The financial warnings have been rendered; these precautions are imperative. Now CIEL’s analysis is that pension fund fiduciaries must consider the climate risk in their portfolios and should act accordingly to protect their funds from losses or face potential legal repercussions.

Originally posted December 19, 2016