Six Ways Public Pension Funds Can Secure Long-Term Value for Workers
Public pension funds play a critical role in protecting the financial stability of millions of workers and their families, safeguarding their investments against emerging risks, and preserving long-term value. One of the most pressing and undeniable risks is climate change.
As climate-related challenges intensify, public pension funds must adapt their strategies to mitigate these risks. Here are six changes that CFA recommends public pension funds pursue to secure long-term value for workers and beneficiaries while protecting them from the effects of climate change:
1. Conduct a Climate Risk Analysis
Climate risk is no longer a distant threat. It's a present reality with potential consequences for investments across industries. Extreme weather events, regulatory changes, and shifts in public policy around climate action pose significant risks to traditional investment strategies. Public pension funds should do a climate risk analysis to understand just how sustainable and climate-resilient a pension's investments are and how the assessments will inform their decision-making.
Pension fund managers can use frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and Science-Based Targets to assess how climate-related risks impact their portfolios.
Transitioning away from high-risk, carbon-intensive industries can help protect their investments from volatile climate-related disruptions and embrace the financial opportunities in tackling climate change.
2. Make a Clear Plan For Long-Term, Resilient Investments
The best way to secure long-term value for workers and beneficiaries is to prioritize investments in assets that can withstand the test of time, including those that contribute to a more sustainable, resilient future. This means increasing allocations to industries like clean energy, sustainable infrastructure, and green technologies, which are expected to grow as the world transitions to a low-carbon economy.
A solid plan includes concrete outcomes, benchmarks, activity timelines, progress monitoring, and steps to ensure the fund's asset managers are putting the goals into practice.
3. Explicitly Name Climate Risk Management As Part of Fiduciary Duty
Pension trustees have a fiduciary duty to act in the best interests of their beneficiaries, which includes considering both financial and non-financial risks that could impact investments.
Pension fund managers should ensure their foundational investment policies explicitly incorporate climate change as vital to their fiduciary responsibilities. This sets the stage for key actions, like reviewing the carbon footprint of their portfolios, demanding climate disclosures from companies, and holding businesses accountable for their environmental impact.
4. Strengthen Your Fund's Power to Hold Corporations Accountable
US public pension systems own a hefty amount of shares in companies. Those shares mean votes made through "proxy voting" at the company's annual meeting– and this can be a powerful opportunity to harness the power of pension dollars to advance more responsible corporate behavior. Through proxy voting, pension funds can influence corporate policies and practices, ensuring that companies prioritize climate action, sustainability, equitable business practices, and workers' rights.
See here for more on ways funds can level up their corporate engagement.
5. Improve the Fund's Governance for Greater Transparency and Engagement
Because money in public pension funds is the hard-earned compensation of public employees, they have a right to be informed about pension developments that affect their retirement security and have a say in strategies to protect the fund from climate-related risks.
That includes access to the tools and knowledge to understand how climate change affects their investments and how they can advocate for climate-conscious strategies.
Check out three ways to strengthen transparency and engagement with the fund's beneficiaries, including concrete examples.
6. Encourage State Pension Board and Leadership to Provide Political Cover for Environmental Policy Change
Funds should make public statements and engage in policy deliberations to help build the financial case for state policy measures that focus on fiscal responsibility and long-term environmental health and safety benefits for their states' communities. The overall health of a state's population can lead to long-term economic benefits, such as a more productive workforce and reduced healthcare costs. An example of this is a group of major investors pressuring the US government to adopt more stringent methane regulations.
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As climate change continues to disrupt markets, public pension funds face an urgent need to adapt their investment strategies. Ensuring that pension funds are financially sound and climate-resilient is critical for long-term stability.
To learn more about how we're helping pension fund stakeholders shape climate-resilient strategies, visit Climate Finance Action.
