The report focuses on four key areas of the pension industry’s alignment with the Taskforce on Climate-related Disclosures (TCFD):

• global ranking, key findings, and regional performance
• governance & communications
• strategy & risk management
• metrics & targets

The report ranks the world’s 100 largest pension funds, representing AUM (assets under management) of approximately US$11 trillion. The report rankings are aligned with the four core recommendations of the TCFD; namely governance (20%), strategy (29%), risk management (25%), and metrics & targets (26%).

The report finds significant and systemic under-engagement by global pension funds in general reporting, disclosure, and active engagement required to align to the Paris Agreement.

In addition, overall, the report finds that few of the top 100 global pension funds have developed adequate frameworks to respond to climate-change risks, and insufficient alignment with the long-term needs of pension fund members.

An examination of communication by pensions funds with member base found it to be limited; delivered primarily through newsletters and online content. There is a general lack of meaningful two-way dialogue.

The report proposes that pension funds have a fiduciary duty to manage funds in the long-term interest of their members and thus have a duty to consider climate change as an investment risk. Flowing from the findings of this report it is recommended that regulators mandate reporting requirements consistent with TCFD objectives and improve clarity on requirements.

Approximately 20% of funds carry out climate scenario analysis but a common challenge reported was insufficient regulatory guidance on general requirements, asset allocation implementation, and the availability of consistent and comparable climate and emissions data. Few funds are aligning with the Paris Agreement with 85% of funds are not taking any action on thermal coal. The most common risks identified were related to regulatory, policy and stranded-asset issues.

Most pension funds were found to have a disclosure/reporting bias with few having adequate policies in place in relation to asset management engagement for change. Despite this, around half of pension funds to engage companies on climate change to some extent. However, few have defined escalation strategies.

A rapid escalation of low-carbon investment will be required to successfully meet a low-carbon transition and meet Paris Agreement targets. Only a quarter of funds measure and report their low-carbon emissions. An absence of an agreed taxonomy has resulted in a fragmented approach.

Many pension funds have noted a lack of reliable and comparable data released by companies. There is a perception in the industry that there is a lack of climate-impact related investments with suitable risk-return profiles. Generally, pension fund metrics are inadequate. It is estimated that US$90 trillion will need to be invested in low-carbon solutions by 2030.

Overall, there needs to be an increase in tangible action targets not just disclosure targets and reporting.

1. This report is relevant to all pension funds and long-term investors seeking a gap analysis to assist in creating a framework for long-term climate-aligned investing.
2. It is estimated the pension industry will be exposed to US$360 billion a year in climate-related costs over the next decade in the US alone.
3. Only 10% of analysed funds had a formal Paris Agreement-aligned investment policy.
4. No correlation was found between the size of a pension fund and its rating; indicating fund size is no barrier to effective climate-action engagement
5. 90% of assets managed by pension funds (circa US$10 trillion) have yet to undergo adequate climate-risk assessment.
6. On average only 1% of portfolios are allocated to low-carbon solutions.
7. 68% of pension funds do not adequately or formally recognise climate change implications as a material risk.
8. Significant additional engagement is required by global pension funds to meet Paris Agreement and TCFD targets and requirements.
9. More in-depth clarity on practical implementation is required by regulators to help pension funds meet targets.
10. There needs to be increased board oversight and senior executive engagement to drive change and meet targets.