Pension funds across the globe need to rise to the challenge of ‘greening’ their investment strategies and portfolio assets to help the world transition to a net-zero economy, a report by the Economics of Energy Innovation and System Transition (EEIST) programme has stated.

The project, which is led by the University of Exeter and funded by the Department for Energy Security and Net Zero and the Children’s Investment Fund Foundation, produced a report on the role of pension schemes and other asset owners in the net-zero transition.

It warned that is was too late to tackle climate change incrementally, and a dramatic acceleration of progress across society and the global economy was now required.

“The pensions industry has an undeniably important role to play in supporting the journey to net zero, not least through investing for a world that its beneficiaries would want to live in,” the EEIST said.

To meet the challenge of net-zero portfolios and investments, the report stated that fundamental changes were needed to the way investment decision making was framed.

It argued that the current net-zero strategies guiding pension funds were too strongly influenced by ‘modern portfolio theory’, while official climate scenarios were increasingly being regarded as “not being decision-useful”.

Furthermore, with net-zero commitments being made, credible transition plans will increasingly being expected by members, scheme sponsors and regulators, and these plans will need short-term bespoke scenario analysis to set interim targets, according to the EEIST.

The EEIST recommended that pension funds adopt ‘Decision-useful Climate Scenarios’, an approach that aims to deliver analysis of future investment risks and opportunities through the application of plausible real-world narratives.

“Inspired by EEIST’s ‘Ten Principles for Policy Making in the Energy Transition’, we propose ‘Ten Transition Planning Principles for Pension Funds’,” the report added.

“These principles provide a framework for transformational net-zero decision making and embedding the associated change in risk culture.”

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