95% of European pension funds ignore climate change impact: Mercer

Just 5% of European pension funds have considered financial impact of climate change, despite extreme weather changes, according to a new report. 

According to the European Asset Allocation Report, published by fund administration and research experts Mercer, despite a slight improvement since 2016, the vast majority of responding funds are “still not active” on climate issues.

With NASA stating that April 2017 was the second hottest since records began in 1880 (with 2016 the hottest), Mercer’s recent report has found that only 5% of 1,241 European pensions schemes have considered the investment risk posed by climate change.

As a result the consultancy has called for “more urgency from the industry “to address the issue.

The 2017 report – Mercer’s 15th edition – gathers information from 1,241 institutional investors across 13 countries, reflecting total assets of around €1.1 trillion.

As well as investment strategy information, the report tracks the drivers behind Environmental, Social and Corporate Governance (ESG) integration and two key areas within responsible investment: investor stewardship and active ownership rights and, secondly, the investment risks and opportunities posed by climate change.

‘Do a whole lot more’

Phil Edwards, Mercer’s global director of strategic research, said: “The report findings highlight the need for the industry as a whole to do more; it’s ironic that the pace of response to this enormous issue is best described as glacial, outside a small group of leading funds.

“The Paris Agreement, which came into force in November 2016, has set an ambitious target to keep global warming well below 2˚C above pre-industrial levels, with a stretch target of 1.5˚C.  It provided a strong signal as to the long-term direction of climate related policy; investors must therefore consider the potential financial impacts of climate change on their portfolios.

‘Inactivity by pension schemes’

“Inactivity by pension schemes brings risks from stranded assets and physical climate risks, as well as reputational concerns. A proactive approach can open up investment opportunities in the green fields of the low carbon economy.”

Mercer is calling on trustees to begin prioritising the issue, at the same time recognising its own role in educating trustees on this issue.

In 2015, ahead of the global climate negotiations in Paris, Mercer published Investing in a Time of Climate Change, a report outlining four plausible climate change scenarios (considering warming levels by the end of the century from 2˚C to 4˚C) and the impact that each scenario could have on investment returns.

The report found that the biggest impacts were under a 2˚C scenario and crucially long-term investors could position their portfolios for such a scenario without materially reducing expected returns.

Mercer’s latest European Asset Allocation report found that there has been a gradual increase in the number of European pension schemes factoring environmental, social and corporate governance issues into their investment process. Financial materiality was the main driver behind this trend, cited by 28% of respondents in 2017 compared to 20% in 2016, the report states.

Reputational risk

This was followed by reputational risk, cited by 20% in 2017 compared to 16% in 2016. The report also found that around 20% of asset owners integrate ESG risks into their investment beliefs and policy with 22% of those surveyed having a standalone responsible investment (RI) policy.

The report also asked participants how they act as active owners (exercising voting rights in pursuit of good corporate governance) to meet their stewardship obligations. 28% of asset owners consider ESG and stewardship as part of the manager selection and monitoring process.

This was up from 22% in 2016. Furthermore, 29% of asset owners request that their advisor monitors stewardship issues on their behalf, up from 20% from 2016, Mercer said.

There has also been an increase in expectations for disclosure, with 9% of asset owners reporting on their stewardship activities publicly (up from 6% last year).  Mercer continues to anticipate growth in public reporting by asset owners.

‘Positive development’

Kate Brett, senior RI specialist at Mercer said: “The increase in asset owners citing financial materiality as the driver behind considering ESG risks is a positive development for the market – asset owners simply cannot afford to dismiss ESG risks as non-financial.

“Regulators are increasingly clear that asset owners should be considering all risks that may be financially material, including ESG related risks and longer-term risks such as climate change – proactive consideration of these issues is absolutely consistent with fiduciary duty.

“The forthcoming recommendations of the Financial Stability Board’s Task Force on Climate Related Financial Disclosures are likely to help drive further focus on climate risk management by asset owner,” she said.

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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