Pension Investor Perspectives on Addressing Climate Change

The Paris climate agreement defines a goal of keeping a global temperature rise well below 2°C above pre-industrial levels and to pursue efforts to limit temperature increase to 1.5°C. The Agreement guides United Nations’ Parties towards a low-carbon economy, but reaching this global goal requires that a great amount of current coal and other fossil fuel reserves need to be left in the ground, stranded. This has left investors and other stakeholders pondering whether their carbon-intensive investments could be at risk. Climate risk management has been taken along in investors’ decision making by incorporating knowledge about climate-related topics to gain benefits and to reduce losses. This thesis is based on concepts of corporate social responsibility (CSR) and how institutional investors are working with companies to help deliver the Paris Agreement and accelerate the low-carbon transition. Pension funds form one of the biggest institutional investor groups, and in this thesis I study whether, and how, the five biggest pension funds by assets under management in Finland address climate change and have begun shifting their investments from fossil fuel-based companies to companies advancing the use of renewables or clean technology, or to companies that are in other ways significantly less carbon intensive. The five organisations were selected for this study based on geographical location, earlier studies and rankings, data availability and size of assets under management. This thesis adopts an exploratory multiple case study approach. The study is based on qualitative data gathered from Finnish pension investors’ sustainability and corporate social responsibility reports, climate agendas, and other releases regarding responsible investing, as well as information gained from face-to-face interviews with the pension investors’ responsible investment representatives. The main purpose is to provide a broad understanding on how the pension investors accelerate the low-carbon transition and on the ways climate change is addressed in the sector rather than rank individual pension investors. I find that Finnish pension investors have acknowledged the importance of slowing down climate change and the need to measure, report and reduce carbon footprints. All the pension investors examined in this thesis carry out a climate risk assessment that is integrated in the investment process and calculate the carbon footprint of their direct listed equity investments. This answers to the first part of the research question whether the pension investors address climate change and have begun shifting their investments, and the answer is that yes, they do and have. From there on differences occur on how and to what extent they do that. Above all, climate change is addressed through both risk management and responsibility perspectives, and it is practiced through shareholders’ three traditional choices that are loyalty, exit and voice. Whereas some of the examined investors have policies regarding exclusion of carbon intensive companies, all the interviewed investors highlighted the importance of active ownership, the voice. The field is yet a developing one and best practices are still debated. Comparability and consistency are generally demanded for more comprehensive disclosure and better risk assessment. The results of this thesis add value to the discussion of best practices, however, there is a need for further research about the actual impacts of shareholder activism in regards of mitigating climate change. Also, as reporting and disclosure improve, there could be more possibilities for quantitative research regarding pension investors shifting their investments from fossil fuel-based companies to companies advancing the use of renewables or clean technology, or to companies that are in other ways significantly less carbon intensive