Big pension funds committed to net-zero transition despite US shift

The world’s biggest public pension and sovereign wealth funds are still convinced of the need to finance the energy transition despite a shift in US policies which is creating investment opportunities elsewhere, especially in Asia, a new report shows.

The report by the Official Monetary and Financial Institutions Forum (OMFIF), an economic thinktank, is the outcome of meetings it held with funds with over US$5tn in assets under management. The meetings with funds from both developed and emerging markets were coordinated with Moody’s Rating and the MSCI Institute.

“Unanimously, these investors remain committed to financing the transition to a sustainable economy,” the report concludes.

Since the re-election of Donald Trump as US president, some funds have reported delays and changes in the ambition of the strategies of the companies they invest in, OMFIF said.

“However, while participants were determined to acknowledge and adapt to current political realities, they remained convinced of the imperative to participate in and support the long-term transition of the global economy,” the report said.

It added that the US rollback on climate was creating opportunities for investment in other regions, particularly in the Asia-Pacific region, as well as in the renewables sector.

“Climate-orientated capital is now flowing towards countries continuing to support clean energy development, particularly in Asia,” it said.

Pressure is mounting on pension funds to take more account of climate change risks, with campaigners calling on trustees to make sustainable investment decisions and use their voting power to push companies they invest in to go green.

Last week, a group of 44 civil society organisations from seven countries released an open letter urging pension fund trustees to protect pensions from planetary and economic collapse.

“We call on you to use the money and influence you wield on our behalf, to prevent drastic economic collapse, driven by food system shocks, water insecurity, heat stress, increased pandemic risk, and mass displacement as vast swathes of land become first uninsurable, and then uninhabitable,” the letter reads.

A big Dutch pension fund has withdrawn mandates from BlackRock, Legal & General and AQR Capital Management due to a shift in investment strategy that puts a bigger emphasis on sustainability.

The world’s listed companies could face total losses of about $1.3tn from physical climate hazards over the next year, according to analysis from MSCI cited in the report.

“Physical risk is now measurable, financially material and systemic. Integrating it into investment and corporate decision-making is essential for protecting portfolios and ensuring that capital supports both mitigation and adaptation,” said Rumi Mahmood, executive director of MSCI.

The OMFIF report said funds are noticing that companies they invest in are delaying or scaling down their net-zero targets, so funds are leaning on external frameworks to encourage disclosure on these plans, such as the Science Based Targets initiative.

In developing economies, the funds believe that concessional finance to leverage private capital will be vital to support the energy transition. The report said cuts to US development funding have hurt those efforts, but carbon markets could help fill the financing gap.

OMFIF said funds increasingly recognise the links between healthy natural systems and a healthy economy, but investors are at a much earlier stage of assessing their impacts and dependencies on nature, compared to their understanding of climate change.

“Many are struggling to put a financial number to these relationships, and several complain about shortcomings in the available data and tools,” the report said.

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