Pension funds are not investing enough in assets, like infrastructure, to combat global warming and should “get out very quickly” of “high cost, high carbon” expenditure, Christiana Figueres, executive secretary at the UN Framework Convention on Climate Change (UNFCCC), told delegates at the UK’s Pensions and Lifetime Savings Association (PLSA) conference in Edinburgh last week.

The outgoing head of the UN’s climate body said awareness of climate change risk had improved but that more action was needed. 

Despite climate finance’s being aligned with long-term investor interests, by virtue of its timescale and predominant asset type – infrastructure – institutional investors are “paradoxically”, in comparison to their size, the least engaged in this area, she said.

“I’m here to ring a bell of alarm for you and to tell you frankly that that can, should and must change – because of the risk to the global economy, that’s why,” she said. 

“As long-term investors, you are the best positioned to make a choice about what kind of infrastructure we’re going to build in the next 5-10 years.”

She said there was more awareness about the urgency of assessing climate change risk but serious engagement was lagging.

“I woke up the day after Paris having swallowed an alarm clock,” she said. “We have five years to turn this huge ship around, but I don’t see the urgency being really understood, in particular in the financial world.”

With respect to fiduciary duty, Figueres said there was a need to redefine what was understood by that concept and that long-term investors were best placed to take the lead.

She urged anyone with a high-cost, high-carbon investment to “get out very quickly”.

Donald MacDonald, chair of the Institutional Investors Group on Climate Change (IIGCC), said the Paris agreement, COP21, caused “a seismic shift in the way the investment world is going to have to look at the issues of climate change and capital”.

It presents asset owners with several key issues they need to address from a fiduciary point of view, he said, including that “climate change is a reality accepted by virtually every government” and that the implementation of the targets set by countries, the INDCs (Intended Nationally Determined Contributions), “will have far-reaching consequences for pensions regulation, insurance regulation and financial regulation”.

David Adkins, CIO at The Pensions Trust but sharing his personal views, focused on practical aspects for pension schemes and their trustees.

Climate-change risk, he said, should be treated like any other risk, and trustees should refrain from focusing on ethical or emotional arguments.

He suggested thinking about climate-change risk in terms of whether it would “make or lose money”, noting that active fund managers were better placed to manage the risk than a passive portfolio. 

On an earlier panel, pension fund executives discussed how best to deal with climate change from an investment perspective.

They largely dismissed divestment as being ineffective – “a complete waste of time,” according to one – and instead argued in favour of engagement and exploring attractive clean-energy investment alternatives, such as solar or waste-to-energy.

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