A new study from technology and risk management company, Ortec Finance, shows that Canadian pension funds are among the most vulnerable in the world to climate change. The study of 30 Canadian pension funds further shows that investment returns could decline up to 44 per cent by 2050 if climate policies remain unaddressed. Severe physical risks, meanwhile, could cut alternative investment and equity portfolio returns by almost 60 per cent by 2050.
Canadian pension funds, they say, are particularly vulnerable to sudden or disruptive net zero policy measures. “In the most extreme scenarios, a sudden realization of disruptive climate policies could spark a financial crisis with investment returns declining by up to 15 per cent between 2025 and 2030,” the climate scenario analysis provider states. “In its net-zero financial crisis stress scenario pension fund equity investments would be most impacted, reducing by up to 24 per cent by 2030 as market overreactions and sentiment shocks from a mass sell-off of carbon intensive assets trigger liquidity challenges.”
Worst-case scenario
The seven possible climate scenarios being tested, these are applied to a reference portfolio of the 30 funds, also indicates that the absence of discernable decarbonization will increase levels of physical risk, leading to severe financial impacts, also by the mid-2030s. “In a worst-case scenario, returns in the portfolios of the 30 top Canadian pension funds could decline by up to 44 per cent in 2050,” as rising temperatures increase extreme weather events and adversely affect agricultural, labour and industrial productivity. “This has a profound and widespread impact on economies, collectively reducing asset performance across all asset classes.”
The report, entitled Climate risk assessment – Top 30 Canadian pension funds: A top-down analysis with Ortec Finance Climate Scenarios, says transition risk is the most significant and imminent risk facing the top funds over the next five years. Longer term, physical risks which take longer to materialize are expected to have the greatest negative impact on portfolios.
“The greatest harm to a top 30 Canadian pension funds’ investment portfolio is likely to arise from either: 1) drastic and uncoordinated policy changes aimed at driving a low-carbon transition in the short-term, or 2) failing to undertake the transition to a low-carbon economy leading to severe physical risks in the long-term,” they write.
Litigation risk
The report recommends detailed climate risk assessments for pension funds to address the known climate risks in an effort to mitigate them and the risk of litigation. “Pension funds that are unprepared for these rapid changes may face increased risks of stranded assets or decreased asset values. Moreover, there is an emerging litigation risk for pension funds that fail to adequately consider climate risks in their investment strategies,” the report states. “Ultimately, the ability of Canadian pension funds to anticipate and adapt to climate-related risk will be crucial in achieving sustainable, long-term growth and fulfilling their fiduciary duties.”
