UK and European pension schemes are "ahead of the rest of the world" at incorporating the risk and opportunities of climate change within their investment portfolios, PGIM chief operating officer, Taimur Hyat, has stated.

“Climate change is an investment factor, both on the opportunity and the risk side, that every investor needs to incorporate into their portfolios around the world. Many UK pension plans and their European counterparts are ahead of the rest of the world in doing this,” Hyat said at the PLSA’s 2021 investment conference.

According to a recent PGIM report, Weathering climate change, 96 per cent of respondents in the UK and Europe stated climate change as very important or somewhat important to its organisation, with 81 per cent in UK and Europe incorporating climate change into their investment processes.

“The sunset of fossil fuels will be long and complex,” Hyat warned. “Even under the most benign scenarios, global energy supply and demand means that 40-50 per cent of our energy supplies will still be coming from fossil fuels in 2050.”

PGIM’s report found that the use of fossil fuels for global energy requirements will decrease by just 11 percentage points in 30 years, from 57 per cent in 2020 to 46 per cent in 2050. During the same time, renewables will increase from 17 per cent to 28 per cent.

However, PGIM Fixed Income head of environmental, social and governance research, Eugenia Unanyants-Jackson added that “alongside risks there are also significant opportunities related to climate that are not limited to purely green infrastructure or renewables”.

PGIM’s report respondents classed infrastructure as the most likely sector for long-term climate change investment risk and opportunities, with 67 per cent of respondents putting it as an opportunity and 41 per cent as a risk.

The second highest opportunity, according to the report’s respondents, was private equity at 55 per cent, (with 27 per cent saying it was a risk) and then public equities, with an equal 46 per cent saying opportunity and risk. The only area that rated higher for risk was real estate, with 48 per cent saying so, and just 38 per cent saying it as an opportunity.

“Pension funds are trying to understand the underlying climate risk exposures in their portfolios. There is a clear demand for understanding the carbon footprint and intensity of their portfolio, both in absolute terms and compared to the benchmark,” Unanyants-Jackson added.

To achieve this, RPMI Railpen head of sustainable ownership, Michael Marshall, also speaking at the conference session, recommended breaking down climate considerations, when investing, to a risk/return question and separately to consider the climate imperative.

"When looking at climate risk, it is the embedding of this in your investment strategy planning; it is not something that can be dealt with by procuring a third-party report once a year," he added.

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