Conflicting commitments? Examining pension funds, fossil fuel assets and climate policy in the organisation for economic co-operation and development (OECD)

Arthur Rempel,Joyeeta Gupta

doi:10.1016/j.erss.2020.101736

Arthur Rempel, Joyeeta Gupta

Open Access

https://doi.org/10.1016/j.erss.2020.101736

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Abstract

The 2015 Paris Agreement on Climate Change implicitly calls for leaving 80% of coal, 50% of gas and 33% of oil reserves underground. This paper studies the scarcely addressed relationship between investors like pension funds and climate policy implementation by addressing the question: what is the extent of pension fund investments in the fossil fuel sector, what is the range of actions that pension funds take to address environmental issues, and what does this suggest about pension fund commitments to ambitious climate targets through leaving fossil fuels underground? A small sample of pension funds alone manages at least €79 billion in liquid fossil fuel assets, suggesting that OECD pension funds may jointly manage between €238–828 billion. Sustainability reports reveal that pension funds engage in five actions to implement climate policies: 1) divestment; 2) direct engagement; 3) carbon footprint calculations; 4) investing in ‘green’ alternatives; and 5) engaging in climate-oriented coalitions. However, their use of these actions is so far ineffective and counterproductive to taming the fossil fuel sector. Pension funds are not fully committed to leaving fossil fuels underground, which de facto renders them not yet committed to meeting ambitious climate targets. Forthcoming policies must target investors like pension funds to improve the prospects of meeting such targets and protect vulnerable countries from inheriting the risks of stranded assets.

Highlights

Norwegian fund GPF accounts for 45% of this; Dutch fund ABP and American funds CalPERS and CalSTRS jointly account for 32% – together managing roughly €25 billion in fossil assets
This paper has updated estimates of the extent of pension fund assets in the fossil fuel sector, contributed to the divestment vs. engagement debate by identifying a broader range of environmental actions undertaken by pension funds, and determined whether these assets and actions jointly align with ambitious climate targets through Leaving Fossil Fuels Underground (LFFU)
We statistically find that: (a) sampled pension funds hold almost €79 billion in liquid fossil fuel assets; and (b) speculating beyond the sample suggests that OECD pension funds likely manage several hundreds of billions of euros in liquid fossil fuel assets, possibly within the range of €238–828 billion

Summary

Introduction

In 2015, the Paris Agreement on Climate Change (PA 2015) [2] adopted three objectives, two of which are focal points of this research1 – the first to ensure that average global temperatures don’t exceed 1.5–2 °C above pre-industrial levels, and the third to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” [2: Art. 2.1c]. This third objective is a nod to the larger structural problems in the global arena. Given the €79 billion of fossil fuel assets that the sampled pension funds manage (see Section 3.2) and potentially €238–828 billion managed by funds within the OECD (see Section 3.3), we consider the range of actions that are taken in relation to this equity to align with

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