Pension funds, unlike commercial banks, have to manage returns for the long term so as to ensure they fulfill the promises made to employees who may be decades from retirement. Thinking about the future – and new financial risks – is therefore one of their most important responsibilities.
Recent hurricanes and wildfires in the United States have underscored that climate change has become a new source of major financial risk, which will almost certainly grow in coming decades. To date, however, the Maryland pension fund has been slow to respond comprehensively to this challenge, even as tidal flooding has become a regular feature in parts of Annapolis just blocks away from government offices.
The Maryland State Retirement and Pension System (SRPS) manages over $47 billion in assets on behalf of 380,000 members across numerous state and local government agencies. State pension funds such as Maryland’s invest funds in a broad swath of the global economy. Climate change poses real risks to those investments in a number of ways, including direct impacts from weather events, loss of competitiveness for companies in affected industries, and legal liability for the mismanagement of such risks. These risks create a vulnerability for Maryland and all other states with long-term obligations to their residents and employees.
Other states’ actions
Pension funds in other jurisdictions have begun addressing the risks resulting from climate change impacts and policies. In June of this year, a task force of international financiers led by former New York Mayor Michael Bloomberg also issued a report highlighting these risks and the need for greater disclosures.
Maryland’s SRPS did contribute to some early thinking with other pension funds about how to deal with climate change in investment decisions and has taken some initial steps to engage in proxy voting. However, more can and should be done – starting now – both individually and in concert with other pension funds and long-term asset holders, institutions collectively managing about $100 trillion.
In a study we recently co-authored, we identified some of the areas for potential improvement. The Maryland SRPS could, for example, learn from other states’ pension management practices and incorporate these into the system’s framework. The California Public Employees’ Retirement System and the New York State Common Retirement Fund have commissioned reports to analyze their portfolio’s climate risks and approved climate change resolutions for five major energy companies this year along with other shareholders.
Other tools they have used include proxy voting to place climate change risk management experts on corporate boards and shifting capital to companies with lower emissions or investing in green bonds. They are also looking at the opportunities for good returns from green energy technologies and products that enhance resilience to climate impacts.
There are also known industry best practices for managing climate risk through clarifying investment guidelines and philosophy with respect to climate change, risk assessment, active ownership, asset reallocation, and transparency. The Maryland SRPS has initiated some of these best practices but has considerable room to do more.
On transparency, for example, the Asset Owners Disclosure Project gave SRPS a “D” ranking for 2017 meaning “Bystander,” tying for 218th out of 500 asset owners indexed. We also recommend that the Maryland SRPS clarify its investment principles, undertaking a comprehensive climate risk assessment, and increasing corporate engagement and transparency. But the first and most critical step is to openly acknowledge the significance of the risks and an intent to address them seriously.
At a time when the national government has abandoned climate change leadership, the actions of states and financial institutions matter more than ever. Maryland should be leading on this issue, because of the risks to our investments as well as our own vulnerability to climate change. These few basic steps can further advance our state as a national leader and reflect the best scientific understanding of the risks that climate change presents to Maryland’s investments.
Nathan Hultman is the director of the Center for Global Sustainability at the University of Maryland. Alan Miller retired as a specialist in the Climate Business Department at the International Finance Corporation in December 2013 and is now an independent consultant.