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September 20, 2022updated 21 Sep 2022 9:35am

US corporate DC pensions’ carbon intensity 124x that of sponsor firms

Landmark analysis of the carbon emissions of 38 US corporate defined-contribution pension schemes, to be released today, aims to encourage companies to assess the climate impact of their retirement fund portfolios and cash deposits.

By Vibeka Mair

Jenna Nicholas, chief executive of Impact Experience, the consultancy behind the new research. (Photo courtesy of Impact Experience)
  • New analysis shows that defined-contribution (DC) pension plans’ carbon intensity heavily exceeds that of their corporate sponsors’ operations but companies do not include this data in their Scope 3 emissions reporting.
  • Business Climate Finance Initiative, the new organisation that did the research, aims to work with businesses to assess and report on the climate impact of their corporate cash deposits and retirement funds.
  • Executives from companies such as Coca-Cola and Netflix are meeting BCFI on the launch of its report today to discuss the issue of decarbonising pension portfolios and cash deposits.

With US political partisanship fiercer than ever, ESG in finance is facing a backlash and has become a key Democrat-Republican divide – but private-sector pension schemes look set to escape the fallout that is affecting many of their public-sector counterparts.

Even as some US states are moving to ban their public institutions from employing firms that lend or invest based on ESG criteria, the federal government may make it easier for retirement plans to incorporate environmental or social factors in their allocation decisions by rolling back certain Donald Trump-era legislation. In short, American corporate pension schemes will not have to contend with the ESG-related restrictions being imposed on many of their public or state counterparts.

How private-sector retirement plans respond is an important question, as new analysis of a small sample of S&P 500 companies’ defined-contribution (DC) retirement plans suggests that the carbon intensity of their portfolios is generally way higher than that of their sponsor companies’ operations. And DC plans accounted for $10.5trn of the $37.5trn of retirement assets in the US as of the first quarter of this year.

Climate change and greenhouse gas (GHG) emissions – arguably the most urgent ESG issues currently – are the focus of the new research seen exclusively by Capital Monitor that is due to be released today at Climate Week NYC in New York: ‘The carbon impact of US company-sponsored 401(k) plans’.

The report analyses the carbon emissions and intensity of US corporate DC pension plans and how they compare with those of sponsor companies. It was put together by the Business Climate Finance Initiative (BCFI), which was launched by consultancy Impact Experience in partnership with the CFA Institute and consultancy Mercer. BCFI believes it to be the first publicly released analysis of such data.

Corporate pensions’ carbon risk

The study seeks to consider whether corporate plan sponsors in the US should “account for climate metrics in their DC plans, not only to capture the extent of their carbon footprint, but also to understand the material climate risks and opportunities posed to plan participants’ long-term financial outcomes”. Corporate climate pledges in the US rarely consider such factors at present, the report adds.

Representatives from DC pension schemes of companies including drinks group Coca-Cola and tech giant Netflix are set to meet at the report’s launch to discuss decarbonising asset portfolios and cash deposits, says Jenna Nicholas, chief executive of Impact Experience.

Oakland, California-based Impact Experience is looking at building a case for why it is important for companies to go through this process, particularly for decarbonising retirement plans, Nicholas tells Capital Monitor. Accordingly, BCFI seeks to work with businesses on assessing and reporting on the climate impact of their corporate cash deposits and retirement funds.

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The report was based on a sample of 38 non-financial firms’ DC plans randomly picked from the S&P 500 Index as of July and used fund carbon metrics from MSCI as of 15 August. Fifty constituents were chosen initially – 10% of the S&P 500 – but the number was reduced to companies with publicly disclosed plan line-ups and market values.

The pension schemes in the sample had about $200bn in combined assets, of which $110bn in funds was analysed, as only assets in mutual and other pooled funds were considered, in light of data availability. BCFI acknowledges that the sample is not big enough to be representative of all public companies. Nicholas declined to name any of the funds in the research.

Scope 3 reporting shortfall

Emissions from cash deposits and retirement funds fall under Scope 3 emissions – those that sit in companies’ supply or value chains and over which they have no direct ownership or control.

But emissions associated with 401(k) plans are currently excluded from corporate GHG footprints, something that may in part be down to “the nascent methods of calculating financials-related carbon emissions rather than indifference”, the report says. That may change, it adds, as the Partnership for Carbon Accounting Financials (PCAF) has introduced new methods designed to measure financed emissions.

That will mean a significant shift, as the emissions associated with retirement plan assets account for many times the volume of companies’ Scope 1 and 2 emissions, according to the study (see first chart below) – respectively, those produced directly by the company or by the energy, heat or cooling it purchases.

On average, 401(k) plans in the study have financed carbon emissions of 64 tonnes of CO2 equivalent (tCO2e) per $1m of assets invested. In other words, a $1bn plan is on average responsible for 64,000 metric tonnes of CO2.

Moreover, the weighted average carbon intensity (WACI) – that is, carbon emissions per unit of revenue – is much higher for retirement plans in the study than for their corporate sponsors’ Scope 1 and 2 emissions, at 176 tCO2e/$m. On average, it is 33 times higher in respect of median carbon intensity and 124 times for average carbon intensity (see chart below).

What;s more, the ratio of the plans' WACI to that of corporate sponsors is at least 50% even for high-emitting sectors such as industrials (see chart below).

In addition, the carbon emissions of large US-listed corporates could be thousands of times higher than currently reported, as cash is unaccounted for, as Capital Monitor has covered. In some cases it could be the largest source of emissions; increasing them by 91-112% from those disclosed at present.

Moving forward

The report makes three recommendations to companies: understand the climate risks to, and their potential financial impact on, their retirement plan portfolios; offer members a 401(k) option that explicitly considers financially material climate impacts (only 4.7% of DC plans do so, according to the Plans Sponsor Council); and measure and monitor the carbon footprint associated with DC plans.

Expected changes to Department of Labor guidelines could make requirements on climate disclosure and investing much clearer for pension plans, Nicholas says. It is proposing a rule that would state that fiduciaries may – and in some cases may be required to – take ESG factors into account when making investment decisions.

No doubt some companies will welcome such a move more than others. It seems the gap between how corporate DC pension plans and certain state retirement schemes invest is set to widen.

Capital Monitor is hosting the second day of its Making Sense of Net Zero webinar series, alongside the New Statesman and Tech Monitor this week, on 21 September. Find more information on NSMG.live.

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