The CHF21bn (€22.4bn) Pensionskasse of the city of Zurich (PKZH) will scale back the emission reduction targets for its equities portfolio if progress in cutting global greenhouse gas (GHG) emissions lags too far behind, according to the pension fund’s new sustainability strategy.
Chief investment officer Jürg Tobler told IPE that the new strategy addresses the risks to the value of the investment portfolio resulting from climate change.
The strategy relies on engagement and the exclusion of coal companies and underweights energy, raw materials, utilities, transport sectors, and emissions-intensive companies to reduce financed emissions, the metric it has switched to from a revenue-based intensity measure.
The greenhouse gas emissions financed by the pension fund, which deviate significantly from market capitalisation, are currently below the One Earth Climate Model (OECM) pathway to limit global warming. The OECM is a climate model focused on demonstrating the feasibility of achieving the 1.5˚C target by 2050 through 100% renewable energy and natural climate solutions.
“If the overall market capitalisation of listed companies develops in line with the OECM reduction path, which is currently the case, our interim [emission reduction] targets apply,” the PKZH CIO said.
This might not be the case if, for example, an appropriate regulatory framework for dealing with negative externalities cannot be found.
“In this case, we would pursue a less ambitious reduction target, 25% below the global equity index,” Tobler added. This is intended to avoid excessively large deviation risks from market capitalisation.”
The pension fund would switch to passively tracking the global stock index if actual greenhouse gas emissions are reduced more rapidly than the target, it has said.
As interim targets, the pension fund is pursuing a reduction of financed emissions, for both equities and corporate bonds, of 65% by 2030, 75% by 2035 and 85% by 2040, compared with 2016.
The pension fund is not a member of the UN-backed Net Zero Asset Owner Alliance, but said these targets are consistent with the Alliance’s requirements.
PKZH targets an annual reduction of financed emissions for its equities portfolio of 3.5%, compared to the previous year, for the period up to 2035, and a constant annual reduction for financed emissions for corporate bonds although the rate for this has not yet been set due to data only being collected for the first time in 2024, the scheme added.
A ‘middle way’
With the new strategy, the pension fund has opted for what Tobler calls a “middle way” between deviating from its own targets and maintaining a less well-diversified portfolio focusing on those companies that are able to meet the pension fund’s objectives.
Uncertainty on how quickly global GHG emissions are cut poses risks when pursuing strictly defined targets, which would require to significantly shift allocations in the portfolio, with the risk of decoupling from the real economy, the pension fund said.
Pension funds can mostly only indirectly influence global GHG, so there is a risk that these will decline less rapidly than a pension fund would want, the CIO said.
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