EU law to force pension funds to account for climate risk

By Caroline Fouvet of Acclimatise

The European Union has passed legislation requiring pension funds to include climate change in their investment strategies. The move follows a move by France, which adopted the first ever nation-wide investor climate reporting law in 2016. The move comes as asset managers are facing increasing pressure to consider climate risks of their portfolios and investment decisions.

The EU legislation, underlines its commitment to address long-term climate risks such as the impact of extreme weather events and sea level rise. For European pension funds, there is a lot at stake, as they manage over € 3 trillion on behalf of 75 million people.

The new law mandates investors to ‘consider environmental, social and governance’ risks while determining their investment strategies. This means that retirement funds will now have to assess the potential negative effects of climate change the same way they take liquidity or operation risks into account when making investment decisions.

Acknowledging the importance of climate risk to medium and long-term investment decisions, the law also underscores the crucial role investors must play in driving adaptation action. Not only do asset managers have the potential to reduce the risk faced by the funds that they manage, but they can also promote business practices and new technologies that can help increase resilience.

There is still some considerable way to go for pension funds to abide by the new European legislation and institutional investors remain the least engaged in climate finance. But with increasingly stringent regulations likely in the future, pension funds are beginning to rethink the way they invest. Those that do can take advantage of emerging opportunities linked to climate change.

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