Can pension funds contribute to the climate transition whilst filling their fiduciary duty?

Stay tuned > Can pension funds contribute to the climate transition whilst filling their fiduciary duty?

- April 21, 2023

Pension Funds blog by Guido Bolliger, CIO

21 April 2023

The fiduciary duties that apply to pension funds when investing assets include security of the investment, risk diversification, sufficient return to match their liabilities, and the avoidance of liquidity mismatches. During the last few years, the actions of both regulators and umbrella associations (e.g. ASIP in Switzerland) led to the integration of material ESG risk in the investment process of pension funds. However, according to the 2022 Swisscanto study[1], if 33% of Swiss pension funds anchored ESG in their investment policy, only 6% of them have set a carbon reduction target. One of the main arguments to justify this lack of environmental ambition, is the potential under-performance of low carbon emission products with respect to the market.

ESG products do not have specific carbon reduction targets, but low carbon, some impact products with environmental targets, and climate transition portfolios do. These products are recent. Therefore, one must be cautious before drawing strong statistical conclusions about their performance. As shown in Table 1, climate transition and impact strategies have not performed worse than the MSCI World since 2016. In 2022, sustainable products, that are generally under-weighted in Energy, did not return much worse than the market. Except for the MSCI ACWI Sustainable Impact index, the tracking-error to the MSCI World is not very high. On top of that, we believe that the risk induced by the climate transition for high emitters (e.g. stranded asset risk) is not properly priced yet by the market and will lead to a significant contraction of their pricing multiples once it materializes.

Table 1: Historical performance of sustainable indices (USD, March 2016 – December 2022)[2]

Except for some specific alternative asset classes (e.g. hedge funds), pension funds can implement their strategic asset allocation with sustainable instruments. As shown above, they can do so without hurting their fiduciary duty.



[2] Data taken from Bloomberg. MSCI World ESG Leaders: NGSINU Index, MSCI World Low Carbon: M1CXSGC Index, MSC World CTB (ESG enh.): NU723911 Index, MSCI World Paris-Aligned: MXWOSXNU Index, MSCI World ACWI Sust. Impact: M1CXBLRV Index, MSCI World: NDDUWI Index.

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