Pensions need to up their climate-risk management game

As the United Kingdom sweats under record-high temperatures, pension fund managers on this side of the pond are being warned about their net-zero targets.

Pension fund administrators should continue to adopt net-zero emissions targets for 2050, and have their targets vetted through third-party certification standards — such as the Science-Based Target initiative or Glasgow Financial Alliance for Net-Zero — according to Building Climate Resilience in Canada’s Pension Funds, a report released by the Smart Prosperity Institute on Wednesday. The institute is a policy think tank based at the University of Ottawa.

Many Canadians are unaware of how their retirement savings may back industries or sectors with significant climate risks, a Smart Prosperity Institute spokesperson said in an email.

Pension funds should require their portfolio companies to have their climate targets vetted by third-party global initiatives, and should also disclose or source the resulting information in their own reporting to stakeholders, the report says.

While investments in climate solutions such as renewable energy are welcome, a focus on climate risk management and disclosure is key to ensure climate resilience.

“Commitments around green or transition assets cannot compensate for assets that do not meet” the requirement to transition to net zero by 2050, the report says.

Climate risks cited in the report include:

• rising global temperatures and extreme weather events that can cause widespread and long-lasting loss and damage to infrastructure and disrupt business environments;
• indirect risks such as supply chain and labour disruptions;
• lawsuits against fossil fuel companies; and
• transition risks through the shift to a lower-carbon economy, including consumer spending patterns and a shift away from carbon-intensive areas.

To conduct climate risk analysis, pension fund managers need information about each of their assets, the report says. That includes the full scope of greenhouse gas emissions associated with the individual asset, which is needed to inform the level of transitional risk.

“The higher the carbon footprint, the more potential that the transition to a low-carbon economy will be disruptive,” the report says.

Public and private companies are not currently obliged to report climate-related information, the authors warn. Pension funds may use third-party data to help fill the gaps, “but this is not a perfect substitute for direct disclosure from the companies themselves.”

Canada’s eight largest pension funds have made joint requests for corporations to improve climate-related disclosures, recommending data be reported in accordance with the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures, the report says.

Authored by Katherine Monahan and Anik Islam, senior fellow and research associate, respectively, with Smart Prosperity Institute, the report was published under licence by the Global Risk Institute in Financial Services.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.