From climate risk to climate opportunity: a functional framework for pension fund investment governance

Crossfire on pension fund climate risk is relentless for good reasons. Climate risk poses a structural problem associated with pension fund governance, and its non-linear, non-cyclical, and long-term nature clashes with the short-term investment strategies that most pension funds routinely apply. Ultimately, climate risk presents a fundamental predicament to the complex set of long-term intergenerational commitments of pension fund stakeholders and the overall resilience of pension funds in the face of market disruptions. Despite increasing investor interest in climate matters, there is limited evidence that this attention has directly impacted emissions reductions, with one of the main reasons for inaction being the lack of adequate policy signals. This chapter aims to fill this gap by rethinking the field of pension fund climate risk. First, it analyses the boundaries of pension fund responsibilities and liabilities by defining pension fund climate risk and the regulatory hurdles to portfolio decarbonisation. Among regulatory hurdles, the article emphasises the confusing concept of fiduciary duties and the lack of sufficient guidance on investment governance. Second, the chapter sets forth a functional legal framework for integrating fiduciary duties within the functions that pension funds are called to routinely discharge in investment governance. The regulatory enablers of the proposed functional legal framework constitute an opportunity to incorporate more transparent and long-term investment governance in pension fund operations. Third, the chapter assesses the reliability of the proposed framework for the sociological premises of pension funds and outlines an appropriate policy response.