More than half of pension funds do not expect their climate change mitigation targets for net-zero carbon dioxide emissions to be met, according to a new survey – and only a sixth have fully embedded climate change goals into portfolios.
The study, by CREATE-Research and sponsored by DWS, is entitled “Net Zero: Going beyond the hype, passive investing 2022” and based on a poll of 50 large pension funds based in North America, Europe and Australasia.
It related that beyond the 16% of pension funds to have completed the implementation of climate goals into investment portfolios, a further 42% were in the process of implementation.
Amin Rajan, chief executive officer of CREATE-Research, said: “Although many pension funds are being highly proactive when it comes to climate change, it is clear that the pensions sector is still in the foothills of net zero action.”
The study’s authors said: “On current reckoning, only 16% of our respondents believe it is ‘very likely’ that their net zero target will be met and a further 24% say ‘somewhat likely’, leaving the remaining 60% saying ‘not likely’.”
However, the researchers went on to say that these results did not mean the COP26 pledges were useless.
“It means they are the start, not the end, of efforts to get the world on track for net zero,” they said.
The key obstacle was that capital markets were not currently pricing in climate risks on a big enough scale to redirect capital towards the net-zero goal, according to the international survey of pension funds, which collectively managed €3.3trn at the end of last year.
“Environmental pollution remains the biggest negative externality that today’s capital markets have yet to tackle. They need advance signals on sanctions and incentives that can assist the essential reallocation of capital,” the report said.
Such signals were slow to materialise because of two sets of mutually reinforcing factors, it said.
The report describes one set of factors being immediate, such as the lack of clarity of companies’ net-zero targets and the dearth of commitment to concrete action, and the other set of factors as being fundamental.
The fundamental factors described include markets failing to deliver the necessary rewiring of the global economy and society when governments do not penalise unsustainable business practices that have no impact on company profits.
“The real problem here is that climate change is a slow-burn issue with indiscernible impacts on a year-to-year basis but with the potential for exponential growth once tipping points are reached,” the report said.
Humans had difficulty responding to nonlinear relationships, the authors said, and most markets simply ignored mounting risks until suddenly forced into an abrupt repricing as irreversible effects kicked in.
“The role of governments is critical in tackling these two formidable handicaps,” the CREATE-Research report said.