Not perfect but on right track: Pension fund climate report


The FDC exceeds its carbon budget but has also made efforts to avoid CO2 emissions (Photo: Shutterstock) 

Luxembourg’s pension fund is little exposed to climate financial risks, a report has found, but it also exceeds its carbon budget to keep the increase in the Earth’s warming below 2°C. 

The Fonds de compensation (FDC)--Luxembourg’s pension fund--presented its first ever climate assessment on 10 December amid a public debate whether it should divest from fossil fuels.

“We’re not perfect,” said social security minister Romain Schneider (LSAP) during a press conference. But he added that since its foundation in 2004, the fund had made much progress on sustainable investing. “We’re on the right track,” he said.

Only 2.22% of the fund’s revenues--or 9% of its holdings--are exposed to so-called stranded assets, the report said. These are assets that could suffer from unanticipated or premature write-downs. Insurer AXA in a June 2020 report had estimated that oil and gas company returns would fall by 40% over the next decade.

Environmental organisation Greenpeace took Schneider to court last year, saying he had not responded to their questions over the fund’s financial climate risks. A court ruled that although the minister should have responded to Greenpeace’s letter, he could not be expected to possess the information it demanded.

The 74-page report published by the FDC on Thursday hopes to remedy this.

The analysis found that more than 90% of the FDC’s portfolio is at low risk of climate change disruptions, such as drought, sea level rises, heatwaves and other natural disasters. “High-risk scores are virtually non-existent,” the report said.

Carbon budget

“In terms of apportioned emissions, these are approximately 13% higher than the emissions officially allowed for a 2°C carbon balance over the period 2012 to 2025,” the report said. The carbon budget is a measure indicating the amount of CO2 the world can emit while limiting warming increases to below 2°C.

The UN has urged to keep warming below 1.5°C compared to pre-industrial levels.

The study also concluded that the fund’s portfolio has an environmental intensity of 3.45%. This means it consumes natural resources worth €34,500 for every million euros of revenue generated. This is below an international benchmark of just under 4%.

“You can always ask whether the benchmark goes far enough,” said Fermand Lepage, president of the FDC, adding, however, that these benchmarks are “representative” and used in comparative studies.

The FDC also highlighted that its green investments helped avoid emissions worth 1,120 tonnes of CO2 per million euros invested. It holds around €382m in green bonds, with only 29 out of 140 of them having disclosed avoided emissions. The amount of emissions actually avoided by the FDC is therefore much higher, the report said.

The portfolio has a carbon to revenue intensity of 284 tonnes of CO2 per million euros of revenue generated, the report said. This is below a 322 tonnes of CO2 international benchmark, calculated by Trucost.

The firm, which also carried out the analysis, assesses risks relating to climate change, natural resource constraints, and broader environmental, social, and governance (ESG) factors.

The study does not include any overall estimate of the fund’s emissions. 

Since its inception, the FDC has generated around €9bn in revenue, meaning that Luxembourg’s pensions are secured for a period of four years even if there were no more contributions paid during that time.

Next steps

Parliament on 3 December passed a motion urging the government to review the fund’s investment strategies with a view of making them more sustainable and environmentally friendly.

The FDC has argued that its current legal framework does not allow it to exclude entire branches of industry, such as fossil fuel companies. This, too, should be investigated, the motion said.

The fund’s strategy was already up for review in 2022, Lepage said during Thursday’s press conference. Lepage said the fund had issued the report to be publicly accountable, but also that it did not “judge” the numbers but merely presented them.

“The next step at the level of the board is to analyse the report in detail and react to is,” the FDC president said. Lepage is set to retire later this month and it will be up to his successor to see through any possible reforms.

The motion by MPs did not include a timeframe for the demanded action.