Pension Funds Letter 12 - COP26, COVID-19: more pressure for a green future

Summary

EDITORIAL

COP26, COVID-19: more pressure for a green future

The coming of summer has also seen the return of extreme heatwaves, catastrophic flooding and devastating forest fires. The arrival of the COP26 could not be more timely given the need for a universal response to the climate crisis. Pension funds as major global asset owners have a key role to play in this response.

Many hopes hinge on the upcoming COP26 especially given the renewed will from the US to address the climate crisis. The Covid-19 crisis in many ways offers an opportunity for a global accord to influence the deployment of massive recovery packages. As investors become increasingly focused on reducing their carbon footprint, we explore some of the actions pension funds could take, from setting responsible investment targets, assessing current exposure to activating strategies for achieving their climate objectives.

Another issue facing investors is the decision of how to incorporate ESG issues into portfolios, in particular within a Strategic Asset Allocation (SAA), the cornerstone of portfolio construction for pension funds.

But how do markets reflect investor’s environmental preferences and how are these preferences measured and observed? Academics have been studying different ways of estimating investor’s preference for green assets, unrelated to fundamental data. This has led to the construction of a green sentiment index showing how “greener” firms can profit and outperform when attitudes towards them are positive.

Regulators are also influencing pension fund's attitude towards responsible investing. The UK and EU are well advanced with proposals to impose climate-related risk assessment and disclosure, whilst the Biden administration is also expected to issue directives with a similar angle.

Finally, as reported in the last edition of the Pension Funds Letter, 2021 has brought some encouraging news to pension funds in terms of improved funding status. Let's look again at the recent trends in some of the key markets.

To conclude, pension funds have started their journey towards greater integration of climate change considerations within their investments, but undoubtedly there is still a long way to go.

EXECUTIVE SUMMARY