Failed low-carbon transition could wipe 33% off pension fund returns – Pension Policy International

Financial Imperatives of Climate Action for Global Pension Funds: An SDG-Aligned Analysis

Introduction: Climate Risk and Sustainable Development

An analysis by Ortec Finance reveals that the long-term financial costs of climate inaction significantly surpass the immediate costs of a transition to a low-carbon economy. This report reframes these findings within the context of the United Nations Sustainable Development Goals (SDGs), highlighting the critical intersection of financial stability and global sustainability objectives. The failure to meet the goals of SDG 13 (Climate Action) poses a direct and substantial threat to global pension funds, potentially eroding returns by up to 33% by 2050 and undermining progress towards other key SDGs.

Economic Projections and the Threat to SDG 8

Climate change is projected to disrupt fundamental drivers of economic stability, directly impacting the achievement of SDG 8 (Decent Work and Economic Growth). The research indicates that unmitigated climate change will reshape global growth expectations through both physical and transition risks.

• Global GDP Impact: In a high-warming scenario, global GDP could fall more than 10% below current expectations by 2050.
• Long-Term Stagnation: Projections beyond 2050 suggest that developed economies risk complete GDP growth stagnation between 2050 and 2075.
• Inflationary Pressures: When factoring in inflation, the outlook for real returns becomes more concerning, further eroding economic stability.

Impact on Pension Funds: A Risk to SDG 1

The financial security of retirees is intrinsically linked to SDG 1 (No Poverty), which includes targets for social protection systems. The modelling demonstrates a severe, escalating risk to pension fund portfolios, threatening the financial well-being of beneficiaries worldwide.

1. By 2028: A modest average impact of a 2% reduction in nominal portfolio returns is projected.
2. By 2035: The impact widens to a 6% reduction in returns.
3. By 2050: The reduction deepens to a catastrophic 33% in a high-warming scenario.

These figures suggest that current asset valuations do not adequately price in irreversible physical risks, such as climate tipping points, leaving portfolios exposed to underestimated downside risks that jeopardize long-term retirement security.

The Case for a Low-Carbon Transition: Aligning with SDG 7 and SDG 13

A coordinated transition to a low-carbon economy, central to SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action), offers the most favorable long-term financial outcome despite potential short-term costs. The analysis shows that the negative impacts of a high-warming scenario begin to outweigh even the worst-case transition scenarios by 2035.

• High-Warming Scenario (Inaction): Results in a 33% decline in pension fund returns by 2050.
• Delayed Net-Zero Scenario: Results in an 8% decline by 2050.
• Net-Zero Financial Crisis Scenario: Results in a 4% decline by 2050.

This data confirms that immediate and decisive climate action is not only an environmental necessity but a financial imperative for safeguarding long-term asset value.

Geographic Disparities and Systemic Risk

The impacts of climate change are not uniform, creating varied risk profiles across different regions and underscoring the need for geographically aware investment strategies to build resilience in line with SDG 11 (Sustainable Cities and Communities). Home bias in pension fund investing can concentrate climate risk in portfolios where domestic markets are disproportionately exposed.

• High-Risk Regions: By 2050, equity markets in Oceania, North America, Asia, and Southern Europe are projected to underperform by 41% to 54% in a high-warming scenario due to exposure to extreme weather and resource scarcity.
• Lower-Risk Regions: Northern Europe is projected to see a smaller decline of 22%, benefiting from cooler conditions and lower physical risk exposure.

Conclusion: The Role of Institutional Investors in Achieving the SDGs

Pension funds hold a pivotal role in facilitating the low-carbon transition. While a single fund cannot alter the global trajectory, their collective influence is substantial. Through strategic asset allocation and engagement, institutional investors can drive the transition, aligning their financial objectives with global sustainability targets. This collective effort represents a critical form of SDG 17 (Partnerships for the Goals), essential for ensuring both long-term financial security and societal well-being in the face of systemic climate risk.

Analysis of the Article in Relation to Sustainable Development Goals (SDGs)

1. Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 13: Climate Action

   • The entire article is centered on the economic consequences of climate change and the urgent need for a “low-carbon economy transition.” It directly addresses the core theme of SDG 13 by analyzing the financial risks associated with “continued inaction” on climate change, referred to as a “high warming scenario.” The research highlights the necessity of a “net-zero transition” to mitigate catastrophic financial impacts.

2. SDG 8: Decent Work and Economic Growth

   • The article explicitly connects climate change to economic stability and growth. It states that unaddressed climate change could “push global GDP over 10 per cent below current expectations by 2050” and that developed economies “risk GDP growth stalling completely between 2050 and 2075.” This directly relates to SDG 8’s goal of promoting sustained, inclusive, and sustainable economic growth.

3. SDG 1: No Poverty

   • The article’s focus on pension funds links climate change to the financial security of individuals, particularly in their old age. A finding that a failed transition could “wipe up to 33 per cent off pension fund returns” implies a severe threat to the financial well-being of retirees. This connects to SDG 1, as secure pension systems are a crucial component of social protection that prevents poverty among the elderly.

4. SDG 11: Sustainable Cities and Communities

   • The article discusses the “physical risks” of climate change, such as “extreme weather events and resource scarcity,” which disproportionately affect different regions. It notes that markets in “Oceania, North America, Asia and southern Europe” are projected to underperform due to these risks. This relates to SDG 11’s aim of making human settlements resilient and safe from climate-related disasters.

5. SDG 17: Partnerships for the Goals

   • The article emphasizes the role of institutional investors in driving change. It states that while “no single pension fund can shift the global trajectory alone, the collective influence of institutional investors is substantial.” This call for collective action from the financial sector to support the “low-carbon transition” aligns with SDG 17’s focus on strengthening the means of implementation and revitalizing global partnerships for sustainable development.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Target 13.2: Integrate climate change measures into national policies, strategies and planning.

   • The article’s central argument for a “low-carbon transition” and the analysis of different “climate scenarios” (e.g., net-zero vs. high warming) directly supports the integration of climate action into economic and financial planning to avoid the severe consequences outlined.

2. Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries.

   • The article warns that inaction on climate change will directly undermine this target by causing “global GDP” to fall significantly and “GDP growth stalling completely” in some regions, thereby threatening sustained economic growth.

3. Target 1.3: Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable.

   • The focus on the vulnerability of pension funds, which are a key social protection system for the elderly, directly relates to this target. The potential 33% loss in returns represents a major threat to the stability and coverage of these systems.

4. Target 11.b: By 2020, substantially increase the number of cities and human settlements adopting and implementing integrated policies and plans towards inclusion, resource efficiency, mitigation and adaptation to climate change, disaster risk reduction and develop and implement, in line with the Sendai Framework for Disaster Risk Reduction 2015–2030, holistic disaster risk management at all levels.

   • The article’s discussion of varying regional exposure to “physical risks” like “extreme weather events” underscores the need for geographically-specific risk mitigation and adaptation strategies, which is the essence of this target.

5. Target 17.17: Encourage and promote effective public, public-private and civil society partnerships, building on the experience and resourcing strategies of partnerships.

   • The article’s conclusion that “pension funds play a key role in supporting the low-carbon transition” and its reference to the “collective influence of institutional investors” is a direct call for a private-sector partnership to achieve global climate goals.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Indicators of Economic Loss and Growth

   • The article provides several quantitative metrics that can serve as indicators. These include: the percentage change in pension fund returns (e.g., “33 per cent off pension fund returns”), the percentage deviation of GDP from expectations (e.g., “global GDP over 10 per cent below current expectations”), and the performance of equity markets in different regions (e.g., underperforming by “between 41 per cent and 54 per cent”). These directly measure the economic impact of climate change.

2. Indicators of Investment and Asset Allocation

   • The article implies the need for indicators related to investment flows. The call for pension funds to “rethink strategic asset allocation to incorporate geographic variation” and avoid “stranded assets” suggests that tracking the amount of capital reallocated from high-carbon to low-carbon assets would be a key indicator of progress in the transition.

3. Indicators of Inflation

   • The article mentions that when “inflationary pressures are factored in, the outlook becomes even more concerning.” This implies that inflation rates, particularly in relation to different climate scenarios, can be used as an indicator to measure the financial stability and real-term economic impact of climate inaction.

4. Table of SDGs, Targets, and Indicators

Source: pensionpolicyinternational.com