Half of US pension returns at risk of climate change wipeout
Climate change could wipe out up to 50% of investment returns for North American and Canadian pension funds by 2040, due to higher exposure to equities and alternatives, raising questions about the climate resilience of the much-cited Maple 8 Model.
UK institutional investors are closely examining their transatlantic counterparts amid ongoing discussions about whether the so-called Maple 8 Model could be replicated in the UK to attract private investment in the country’s ailing infrastructure.
However, the combination of a home bias alongside a relatively higher allocation to alternatives are precisely the factors that leave pension funds more vulnerable to potential climate risks, according to new research by Ortec Finance, a Dutch climate risk modelling firm.
North American and Canadian pension funds find themselves most exposed to the investment risks of climate tipping points, with some funds facing up to half of their future returns being wiped out by 2040 if climate policies remain unchanged. The study attributes these risks to higher equity and alternative allocations.
In contrast, Dutch and Swiss pension funds face a relatively more resilient investment outlook due to their higher allocation to fixed income assets. The UK has the most divergent climate risk outlook, with the country’s mature defined benefit schemes remaining relatively sheltered, while the nascent but rapidly growing defined contribution (DC) market faces higher risks.
Commenting on the results, Doruk Onal, a climate risk specialist at Ortec Finance, said:
“Transition risks are expected to be the dominant climate risk driver compared to physical risks during the 2025–2030 period for pension funds worldwide. Additional low-carbon policies, revised NDCs (Nationally Determined Contributions), and net-zero target reviews by global investor alliance groups may accelerate the stranding of fossil fuel assets, potentially triggering market overreactions and widespread disruption.”
Ortec’s study is published as the UK’s DC funds and local government pension funds face growing pressure from policymakers to increase private market allocations to the domestic market. A new Pension Investment Bill could mandate funds to dedicate a set percentage of their assets to alternatives and UK-domiciled investments.
Aligned with Ortec’s research, a new study warns that pension fund consultants tasked with climate risk modelling remain overly reliant on economic models, which significantly underestimate the material financial damages of climate change.
The paper, jointly published by UCL professor Steve Keen, Carbon Tracker’s Mark Campanale and Joel Benjamin, and University of Exeter’s Professor Tim Lenton and Dr Jesse Abrams, warns that some of the world’s largest asset owners continue to underestimate the potential impact of climate tipping points.
Researchers highlight, among others, the case of Norges Bank Investment Management, the largest sovereign wealth fund in the world. Despite having clearly defined climate targets and engagement strategies, the fund’s climate risk model assumes that a 1.5-degree temperature rise by 2080 would lead to a 9% reduction in portfolio values, while a 2-degree warming scenario would result in a lesser decline in returns of 2–6%.
The paper cautions that fiduciaries are being “misled” by their consultants, which in turn causes them to adopt a more cautious approach towards divesting from fossil fuel assets.
