Fossil Fuel-Related Investments and Climate Change

Abstract

Pressure is mounting on institutional investors to reduce the greenhouse gas emissions resulting from their fossil fuel-related investments. The latest climate change assessments indicate that 1.5°C emission pathways require (1) halving CO2 emissions between 2010 to 2030, and net zero CO2 in 2050; and (2) systems transitions in sectors such as energy, industry, mobility and buildings.

Pension funds are universal asset owners, which brings a shared responsibility for the system transitions. As credible engagement with a company is costly, we recommend pension funds to focus on a limited number of fossil fuel and other major carbon-emitting companies in a more concentrated portfolio. We suggest pension funds (1) to select those companies with a commitment to fully decarbonise with an ambitious and predefined time path and limited use of carbon dioxide removal; (2) to engage deeply with these companies and monitor annually predefined reductions in emissions; and (3) to vote for resolutions that require reductions in greenhouse gas emissions in line with the latest available science.

Keywords: Pension funds, responsible investing, fossil fuels, climate change, engagement

JEL Classification: G11, G23, G34, Q40, Q54