CO₂ emission reporting requirements on govvies confuse Dutch pension funds

Dutch pension funds have committed to the reporting of carbon emissions of their government bond portfolios as of this year, but they are still to be convinced of its value. They also have differences of opinion on whether to treat green bonds as emission-free.

The Partnership for Carbon Accounting Financials (PCAF), an alliance of financial institutions, recently developed a standard by which investors can measure the CO₂ emissions of their government bonds. Such a standard already existed for equities.

Under the PCAF method, investors calculate the emissions from their sovereign bonds by country by dividing the value of those investments by the purchasing power parity-adjusted GDP of the country in question, and then multiplying that by the country’s total greenhouse gas emissions.

In a recently published paper, PCAF admitted its chosen method is “not perfect”. It said: “Countries with higher GDPs adjusted for purchasing power benefit from this method. Take, for example, Thailand (with a population of 71 million) versus Spain (47 million): these countries have similar emissions, but because Spain has a higher GDP per capita it ranks relatively favourably.”

Double counting

Another problem with the new standard is that it leads to double counting. After all, many of a country’s emissions come from publicly traded companies.

“So a pension fund might report a Dutch company’s emissions twice: once if it has an equity stake and again if it also invests in Dutch government bonds. In itself this is not a problem, but you can’t always simply add up the emissions of government bonds and other asset classes,” said Will-Jan Jacobs, a policy adviser at the Pensioenfederatie, the Dutch pension federation.

In addition, PCAF does not provide detailed reporting rules. For example, the organisation does not specify whether green government bonds should be treated differently from regular government bonds when it comes to emissions. After all, the former finance projects that aim to reduce CO₂ emissions.

The Dutch pension federation hopes that pension funds, and eventually the entire Dutch financial sector, will eventually agree to a common approach on this situation.

Is green emission-free?

For now, this is clearly not the case. For example, fiduciary manager Achmea Investment Management told IPE it considers green bonds as emission-free.

By contrast, the Netherlands’ two largest pension funds – PFZW and ABP – have decided to treat green government bonds in the same way as conventional bonds.

“We report the specific CO₂ savings of green government bonds through impact measurement of our sustainable development investments (SDIs),” said a PFZW spokesperson.

Because of the disagreements on the methodology and the inevitability of double-counting, the usefulness of separate CO₂ reports for sovereign bonds “is debatable”, according to PFZW.

Yet the healthcare scheme still sees some merit in it. “It makes historical and cross-country comparisons easier,” the PFZW spokesperson said. ”We can also use the data in conversations we have with the debt-management offices of the countries involved.” 

But according to past experience, engagement with governments rarely yields anything. Moreover, pension funds cannot even sell most of their government bonds, said Jacobs.

“In practice, this is difficult because pension funds have a strategic allocation to government bonds,” he added.

Achmea IM also believes the use of CO₂ reporting on government bonds is still limited at the moment. “It still needs to crystallise further what contribution these new reports can make to reducing the climate problem and the role investors can play in this,” a spokesman for the fiduciary manager said.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication.