Swiss pension funds put at risk efforts to achieve climate goals

Swiss pension funds are jeopardising efforts to achieve their climate goals by continuing to invest in sectors that are damaging to the environment.

According to the Paris Agreement Capital Transition Assessment (PACTA) Climate Test, a report that measures the progress towards climate goals of financial institutions, pension funds invest in companies that are set to increase oil production two-fold in the next five years.

In listed equities, invested companies of pension funds and asset managers plan to increase natural gas production by around 1.5 times by 2026, compared with the levels recorded in 2021.

Oil and gas extraction and power generation represent more than 50% of the exposure of equity portfolios of pension funds, but also of insurers and asset managers, to PACTA sectors, and 75% of the total exposure to PACTA sectors in corporate bonds portfolios.

The PACTA analysis has covered eight carbon-intensive sectors in the economy, including oil and gas, coal, power, automotive, steel, cement and aviation, which generate around 70% of global CO₂ emissions, according to the report.

The report calls pension funds “outliers” for their exposure of more than 4% of their listed equity portfolios to fossil fuels, while among financial institutions the exposure is mostly between 2% and 4%. In corporate bond portfolios, almost half of financial institutions analysed in the report have an exposure to fossil fuels of over 5%.

Investments raise concerns

Pension funds and insurers’ investment plans in listed companies contributing to the increased level of production of oil and natural gas are raising concerns, because as main asset owners they have a “fundamental role to play in greening the financial system,” the report said.

According to the International Renewable Energy Agency, pension funds, insurance companies, sovereign wealth funds, endowments, and foundations manage $87trn in assets that can be invested in clean energy or renewable energy projects, it added.

The PACTA report analysed listed equities, corporate bonds, real estate, and mortgage portfolios of 133 financial institutions, including 13 asset managers, 31 banks, 20 insurance companies, 67 pension funds, and two financial institutions.

The Swiss Federal Office for the Environment (FOEN) cooperates with the State Secretariat for International Finance (SIF) to run PACTA climate tests to assess the steps made by financial institutions to reach the climate goals.

In total, CHF2.3trn in holdings was submitted and analysed in the climate scenario analysis, mostly held in listed equities (CHF1.19trn) and corporate bonds (CHF675.5bn).

Pension funds submitted CHF225.6bn in assets for the analysis of climate goals’ portfolio alignment, including CHF101bn invested in listed equities, CHF74bn in corporate bonds, CHF10.7bn in investment funds and CHF39.7 in other investments, according to the report.

The number of financial institutions taking part in the study decreased from 179 in 2020 to 133 this year. The strongest decline in participants was recorded among pension funds, from 106 in 2020 to 67 in 2022.

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