Pension funds fixate on climate change

The so-called smart money, represented by managers of pension funds, is anticipating a rise in investment complexity and challenges facing investment strategies over the next two years.

A new research report from risk management solutions firm Ortec Finance shows that an increased focus on climate change and a search for yield are driving asset allocation decisions among pension funds.

The international study of pension fund managers responsible for a collective $1.9 trillion worth of assets under management found just 41% believe pension schemes in general are well-prepared for securing the yield they need in order to be fully funded or buyout-ready in the face of climate change challenges.

Meanwhile, the study found 90% expect to see a rise in investment complexity and the challenges facing their funds over the next two years, with almost all funds (97%) interviewed in the U.S., UK, Australia, Canada, the Netherlands, Switzerland, and the Nordics saying technological advances are enabling them to invest in more sophisticated strategies.

Even as ESG strategies in general have lagged the overall equity market performance, their investing appeal continues to grow.

“Climate change risks are dominating the agenda for pension funds having a major impact on scenario modelling and stress testing while also making the search for yield more complicated,” Willemijn Verdegaal, director of strategy and markets at Ortec, said in a statement.

“Technology is however available which can help pension funds balance the demands of rising investment complexity while implementing strategies to address the issue,” he added. “Pension funds need to manage their balance sheet effectively in order to achieve long-term objectives while dealing with short-term risks. That includes identifying major risk sources as well as looking at future pensions, contributions, and funded levels.”

That is translating into increased allocations to green bonds and climate-specific funds, something 62% of pension funds plan to do over the next two years, with 27% intending to dramatically increase allocations to green bonds and 24% expecting to dramatically increase allocations to climate-specific funds.