What is the solution?
Develop an investment policy for your pension fund and reserves that aligns with your mission and will help drive the transition to a sustainable low-carbon economy (including a no-fossil fuel investment policy). Then select an asset manager (a bank or specialist) that can implement that policy.
Why is it important?
There are two reasons to look at investments with respect to climate change: to avoid losing money and to encourage decarbonisation. The value of fossil fuel companies will drop dramatically when governments announce the robust policies that are inevitably going to be needed to force a reduction of CO2 emissions in the future. By divesting from those shareholdings early, investors are not only reducing the risk of significant financial losses, but also depriving those companies of easy, cheap capital to expand their operations. This is because, when a large proportion of investors shun a sector, companies in that sector will have to issue any new shares at a lower price and will find it harder to access cheap loans.
#1 Divest high carbon-intensity investments
Develop an investment policy aligned with your mission and decarbonisation objectives (no fossil-fuel policy), then find an asset manager that can implement it.
Lobby carbon-intense companies
An alternative to divestment can be to use share-ownership to lobby a company to decarbonise.
#3 Choose a greener bank
Use a bank that has a no-fossil fuel investment policy or has signed up to the Principles for Responsible Investment (PRI). (3) PRI is an independent organisation that has developed six principles for responsible investment. To date, more than 5,000 banks and investment managers have signed the principles, demonstrating their commitment to responsible investment.
#4 Delegate to a specialist asset manager
Several banks and asset managers, such as Globalance, specialise in managing the carbon intensity of investment portfolios and have products and tools to help organisations achieve their decarbonisation ambitions.
ERAFP: investment portfolio carbon neutral by 2050
The French public service additional pension scheme (ERAFP), a public pension fund for civil servants set climate targets for 2025, with the aim of making its investment portfolio carbon neutral by 2050. ERAFP has undertaken to develop shareholder dialogue with thirty or so of the companies with the highest GHG emissions in its portfolio. This commitment will be implemented directly or through collaborative initiatives (Climate Action 100+), as well as via the Scheme’s asset managers. ERAFP also decided to reduce its carbon intensity (in tonnes of CO2 equivalent per thousand euros invested) by 25% between 2019 and 2024 for scopes 1 and 2 of its listed equity and corporate bond portfolios. Third, it aimed to ensure that its non-residential real estate portfolio is aligned with a 1.5°C target scenario, as defined in the Carbon Risk Real Estate Monitor (CRREM). (4) ERAFP is a member of the UN-Convened Net-Zero Asset Owner Alliance (AOA) and won the International Climate Reporting Awards in the category Asset Managers in 2021. (5)
The UK Environment Agency Pension Fund goes net zero
The Environment Agency Pension Fund is funded by employer and employee contributions. They are part of the Local Government Pension Scheme, have around 39,000 members and assets of just over £4 billion. They invest in these assets to generate the returns they need to pay pensions in the long-term. The Fund has agreed a target of getting to net zero by 2045. The target is backed by a science-based plan, with interim targets to ensure it’s on track. (6)
AXA Climate and Biodiversity Reports
Every year since 2015, AXA publishes a Climate Report which describes its current climate strategy and new developments, in line with but also beyond climate reporting frameworks. (7)
ABP is divesting
Europe’s largest pension fund, ABP, has announced it is selling its €15bn-worth of holdings in fossil fuel companies, including Royal Dutch Shell, by 2023, claiming it had been unable to persuade the sector to transition quickly enough towards decarbonisation. (8)
Globalance Bank & B Corp
This Swiss bank’s mission is to enable investors to invest successfully in future-oriented companies that solve global challenges and create a positive future. They have been a B Corp since 2015 and have a service specifically for foundations. (9)
UBS: Swiss highest sustainability rating
The UBS is one of the world’s biggest asset managers and was given the highest overall sustainability rating amongst the 15 biggest Swiss retail banks in a 2020/2021 study by WWF Switzerland. (10) It was the only bank in the study to score above-average marks across all the elements of corporate governance, savings, investments and pension provision, and loans and financing.
Investment decisions need to be guided by the risk considerations of a rapidly changing natural world. Asset owners that choose to undertake forward-looking climate scenario assessments will put themselves ahead of the curve in understanding the climate-related risks and opportunities within their portfolios.
Tools and good practices
A personalised digital world map that allows you to discover the impact and returns of your wealth and assess in real-time how sustainable, future-fit and profitable your investments areRead here
Low-carbon, high return: How to decarbonize your portfolio in 4 steps
How can you ensure that your investments are aligned to a low-carbon future? The decarbonising portfolio tells investors how to do just thatRead here
- WWF climate guide to asset owners: aligning investment portfolios with the paris agreement, topline recommendations
- Swiss Pension Funds Rating, WWF, 2019
- European asset owners: climate alignment of public equity and corporate bond portfolios, WWF, 2018
- International Climate Reporting Awards
To go further
Decarbonizing Long-Term Portfolios
An adaptable, top-down approach to addressing climate change in investment portfoliosRead here
UN-convened Net-Zero Asset Owner Alliance
Global asset owners committed to decarbonising their investment portfolios and achieving net-zero emissions by 2050Read here
Taskforce on Climate-related Financial Disclosures
The Task Force consists of 31 members from across the G20, representing both preparers and users of financial disclosuresRead here
- Taskforce on Nature-related Financial Disclosures
- Into the wild - Integrating nature into investment strategies, WWF France and AXA recommendations
- Responsible business conduct for institutional investors, OECD
(1) Florian Eglia, David Schärer and Bjarne Steffen. 2022. Determinants of fossil fuel divestment in European pension funds, Ecological Economics 191. Read here.
(2) Tim Quinson. 2021. Cost of Capital Spikes for Fossil-Fuel Producers, Bloomberg. Read here.
(3) PRI – list of the 290 banks that have signed the Principles for Responsible Banking. Read here.
(4) Retraite additionnelle de la fonction publique. 2021. ERAFP is strengthening its engagement in the fight against climate change by making ambitious decarbonisation commitments and intensifying its shareholder dialogue. Read here.
(5) International Climate Reporting Awards website. Visit here.
(6) Environment Agency Pension Fund, Climate change. Read here.
(7) AXA and climate change. Read here.
(8) Daniel Boffey. 2021. One of world’s biggest pension funds to stop investing in fossil fuels, The Guardian. Read here.
(9) Globalance. Certification as B Corporation: Shape the future. Read here.
(10) WWF Switzerland. 2021. Sustainability in the Swiss Retail Banking Sector: WWF Rating of the Swiss Retail Banking Sector 2020/2021. Read here.
(11) WWF. 2018. How well are European asset owners’ portfolios aligned with the Paris Agreement’s climate goals? Read here.
Cover photo © Piggybank/Unsplash.