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Pension funds track EU climate policy while abandoning net-zero: survey

13 May 2022 Cristina Brooks

A majority of pension funds managing a combined $3.4 trillion in assets do not think they will reach net-zero, but are still putting their faith in the EU's net-zero aligned finance standards.

German asset manager DWS Group's survey of 50 large pension plans from North America, Europe, and Australasia, revealed their mixed views.

Three in five of the pension funds are pursuing net-zero. Many of these (42%) are already implementing a net-zero policy while some (22%) are in the course of deciding to implement one, according to the survey.

Recently, pension funds have joined networks with various net-zero-linked objectives like Climate Action 100+, the UN Principles for Responsible Investing, Institutional Investors Group on Climate Change and the Net-Zero Asset Owners Alliance, it said.

However, 60% of the funds believed it was "not likely" they would meet their net-zero targets, and fewer than one in three (28%) had set interim goals to track progress on reaching them.

Only 16% of survey respondents said it was "very likely" that they would hit their net-zero targets.

There is reason for their doubt: the companies they invest in are largely not accountable to governments or shareholders on emissions targets. "Many companies are pledging to hit their net-zero targets in almost three decades' time without committing to concrete action that can be monitored and for which they will be held accountable," the report said.

Very few companies disclose their emissions under the World Resources Institute's GHG Protocol, it said.

Compounding the problem, companies remain untouched by emissions reporting regulation in many parts of the world, although the UK and New Zealand recently rolled out requirements for large companies, the EU is expanding similar measures, and the US may soon have them too.

Regulation can overcome the lack of corporate net-zero accountability, for example through carbon pricing. "To properly price in climate risks, capital markets need cold hard incentives as much as sanctions. The invisible hand of markets needs to be complemented by the visible boot of governments," the report found.

The report suggested that regulators pass laws to deliver green finance aims, for example the EU's new climate-policy-aligned finance standard, the Green Taxonomy.

Governments aiming to reach national net-zero targets, it said, must force companies to disclose emissions and carbon data if they want to rein in emissions.

Pension funds adopt EU ESG standards

However, 52% of pension funds found that the EU Climate Benchmarks, a pair of EU-policy aligned standards that enable emissions reductions for passive investment funds, were "very important" tools for reaching their net-zero targets.

Of those pension funds surveyed, 56% of them expected to use these EU indexes and 22% already had them in use.

The funds have started to align their assets with climate indexes because, as DWS Group put it, "even if the world increases its carbon footprint and misses the 2050 goal, these new indices will stick to their decarbonization trajectory regardless. Thus, climate action is hardwired into these indices, come what may."

As part of its Paris-Agreement-aligned drive towards carbon neutrality, the EU's executive released its climate action plan for the finance sector in 2018.

The following year, the EU revised regulation on performance standards used to rate the sustainability of investments and indexes, publishing the EU Climate Benchmarks.

One of the EU Climate Benchmarks was aligned with the objectives of the Paris Agreement and the other with mitigating climate risk to investments, according to State Street Financial Advisors.

The EU Climate Benchmarks certified a "new generation of custom-built indices," such as climate-based index funds that may "transform passive investing by tracking the Paris targets instead of tracking their parent indices."

"[EU Climate Benchmark] labels will soon become the badge of product integrity and quality assurance that ESG funds have sorely lacked," said the report's authors.

Popular ESG indices allow pensions activism

Last year, a pension fund for the Nationwide Building Society in the UK proposed moving 25% of its passively managed equities portfolio into a passive ESG index.

In a similar move earlier this month, pension and insurance fund manager Aegon UK, which has committed to both a 2050 net-zero and interim 2030 emissions target, announced plans to transition $3.7 billion of its assets into BlackRock's ESG index fund range.

Last month, Norway's Government Pension Fund Global, a sovereign wealth fund with $1.4 trillion in assets that is not aligned with net-zero, announced that it was switching its ESG policy from a greening mandate to an ESG index.

While passive fund shareholders in traditional index funds or ETFs are not able to force companies to change, those that participate in ESG-indexed funds have the power to engage in shareholder activism by voting at annual governance meetings, even though they cannot easily divest, wrote the report's authors.

A report published by the UN's sustainable development partnership with banks recently encouraged this type of activism, noting that pension funds have fewer constraints on aligning their portfolios to net-zero than do banks and insurers.

Posted 13 May 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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