Pension academic calls for common reporting standard on emissions in Dutch portfolios
While most major pension funds have now adopted net zero targets, a common measure of emissions at portfolio level is still lacking argues Arun Muralidhar, who has examined the carbon footprints of Dutch pension fund portfolios
Dutch pension funds are at the forefront of net zero investing with funds such as ABP and PFZW divesting from fossil fuels and allocating to climate solutions, but also setting bold net zero targets. But how consistent are reporting standards for these net zero targets and could they, perhaps inadvertently sway asset allocation?
Pension academic Arun Muralidhar, co-founder of AlphaEngine Global Investment Solutions, who served among others at the academic advisory board at PFZW has examined the carbon footprint of Dutch pension fund portfolios and argues that greater transparency is required. He criticises the fact that both the Net Zero Asset Owner Alliance and the Net Zero Asset Manager Initiative say they are agnostic on the methodology used to measure carbon footprints.
Muralidhar’s research focusses on tons of CO2e per $1m invested (or tCO2e/$1m), a measure which is already available across many equity funds but much less commonly disclosed at bond fund level, where the climate impact is often measured in tons of CO2e per $ sales or tons of CO2e per $ revenue.
Taking stock of the carbon footprint of 178 Dutch pension funds with this measure, he concludes that they collectively fund more than 3bn kilotons of C02e in financed emissions, the approximate equivalent of 240m cars which is slightly less than the total number of cars registered in the US in 2022.
Overall, there appears to be no apparent link between the size of a pension fund and their carbon intensity though some smaller Dutch pension funds appear to have a relatively higher carbon footprint.
Strategic asset allocation appears to be the key factor determining a pension funds’ carbon footprint as fixed income assets are attributed a far higher carbon footprint than equities. This could to lead investors who are solely focused on reducing their carbon footprint investing with a relatively higher exposure to riskier assets such as equities, which might not be the ideal match for their liabilities, Muralidhar warns.
Muralidhar concludes that asset owners should not leave the measurement of carbon footprints to vendors and should instead get involved with setting standards themselves, with the support of industry bodies such as NZAOA.
Going forward, the growing adoption of TCFD reporting, particularly in markets like the UK, where it is now mandatory, could result in Weighted Average Carbon Intensity playing the role of such a common standard. Muralidhar stresses that he is agnostic as to which index the industry picks, as long as performance become comparable.
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