Pension Systems + Climate Risk: Measurement + Mitigation
Pension funds can potentially play a critical role in combating climate change by providing much needed financing and investment. Intervention is necessary to bridge the financing gap of between $1.6 trillion to $3.8 trillion in mitigation costs and $180 billion in adaptation costs to limit global temperature rise and ecosystem collapse.1 Institutional investors such as pension funds have two motivations to providing such financing. On the other hand, if the investor community does not act, they face a potential portfolio value loss of $10.7 trillion triggered by the materialization of transition, physical and regulatory risks. On the other hand, the transition to a 2oC scenario is expected to yield $2.1 trillion in global “green” investment opportunities for investors.
This report focuses on pension system greening and aims to provide data-driven recommendations to orient climate-aligned investment practices. In order to undertake a holistic analysis, this report consists of the following sections: a literature review outlining the need to green the global pension system (Section 1); a review of relevant national and international actions taken; a climate risk exposure landscape based on quantitative analysis deriving country pension fund climate risk scores ; a complementary regulatory mapping and score that uses a combined quantitative and qualitative approach; and a survey of pension regulators to identify how each supervisory authority is interpreting practices and standards on ESG integration in the pension industry. The final section of the report summarizes the conclusions and key policy recommendations.
In addition, this report relies on insights from a series of case studies conducted, which profile several leading pension funds and their climate investment strategies.
To gain insight into how individual pension funds were crafting their sustainable investment strategies within existing climate risk and regulation frameworks, the team conducted extensive desk review and a series of interviews with pension fund administrators. These case studies are intended to be viewed as a complementary, stand-alone counterpart to our main report. However, the conclusions we drew from these case studies were essential to our analysis. Thus, they are included here as an appendix.