Progress is slow on net zero goals

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 – “Net Zero: Going beyond the hype, passive investing 2022″, from CREATE-Research and sponsored by DWS.

The study, which part of an ongoing series, polled 50 large pension funds based in North America, Europe and Australasia, which collectively manage €3.3 trillion in assets as at 31 December 2021,

It found 16% have fully embedded climate change goals into their investment portfolios while 42% are in the process.

For the remainder, 22% are close to making a decision with 20% at the awareness-raising stage.

Amin Rajan, CREATE-Research.

“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,” says Amin Rajan, chief executive of CREATE-Research.

One of the main challenges highlighted in its report last year is that capital markets were not accurately pricing in climate risks.

The report said “Currently, there is no generally accepted methodology for incorporating climate risks and opportunities into company valuations. Every investor does their own fundamental research or runs their own quantitative strategies.”

“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.

One was the lack of clarity of companies’ net-zero targets and the dearth of commitment to concrete action, and the other is ties to fundamental factors.

These 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.

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