Pension funds should be forced to assess the risk of carbon emissions and climate change to their portfolio, with a new report backed by France’s Caisse des Dépôts calling on the European Commission to include provisions in the revised IORP Directive.

The wide-ranging report, commissioned by the Directorate-General for Climate Action, highlighted the absence of large-scale projects, the less favourable risk/return profile and high transaction costs as holding back growth of climate-friendly investments.

Backed by CDC Climat, the subsidiary of Caisse devoted to climate investments, the Climate Bonds Initiative and the United Nations Environment Programme Finance Initiative, it also called for a number of changes to pension regulation to incentivise investment.

It suggested that disclosure requirements for pension investors should be “strengthened” to include climate performance metrics and carbon risk assessments, while climate concerns should also inform the stewardship of assets.

“Here, it is worth noting the normative power the EU has globally, which implies that uptake of risk tools in the EU would be expected to influence developments elsewhere, particularly in emerging markets,” the report said.

However, it concluded that integrating carbon and climate-related risks into regular portfolio stress tests would be a matter for the long term, as it would require the methodologies to be developed.

The report nevertheless suggested the IORP Directive be used as a way of requiring pension investors to consider such risks, in line with the Commission’s initial proposals that the risk-evaluation for pensions (REP) consider climate risk.

The REP was later amended during negotiations between member states, removing any direct reference to climate change.

The report also looked at how the further development of green bonds could help with climate-friendly financing, such as enhancing the creditworthiness of the issuances through the Commission’s European Fund for Strategic Investments (EFSI).

It also proposed that, as part of the Capital Markets Union’s focus on securitisation, green asset-backed securities be prioritised.

Climate Bonds Initiative chief executive Sean Kidney said each area of the report would offer suggestions relevant to the CMU and the EFSI, placing them “squarely on the mainstream financial policy agenda”.

“The shorter-term policy options for the EU proposed in the report are all about making climate-friendly assets more attractive for institutional investors,” he added.