The Organisation for Economic Co-operation and Development (OECD) will next week publish a Working Paper on the "Role of Pension Funds in Financing Green Growth Initiatives".
> Download a sneak preview here.
The paper is part of their major Green Growth initiative and their Institutional Investors and Long-term Investment work.
The paper provides a thorough and easy-to-read overview of initiatives aimed at connecting pension funds with green growth projects. Different financing mechanisms are outlined — including climate bonds — and suggestions made as to what role governments, especially pension fund regulatory and supervisory authorities, can do to support pension fund investment in this sector.
The paper notes that pension funds' asset allocation to green investments remains low, partly because of a lack of environmental policy support, but also because of a lack of appropriate investment vehicles and market liquidity, scale issues, regulatory disincentives and lack of knowledge, track record and expertise. It argues that, to tap into this source of capital, governments have to ensure that attractive and liquid opportunities and instruments are available to pension funds and institutional investors – such as green bonds and green funds.
They make a distinct recommendation in support of Climate Bonds Standards.
“Governments should also support the setting up of a “rating agency” or standard setter to “approve” green projects (such as green bonds or green funds).A simple step would be for the OECD member countries to participate in and support investor-driven ratings initiatives such as the Climate Bonds Standards Scheme.
Governments could also use the eligibility criteria of such schemes as a base reference for preferencing policies around fixed income investments. This would ensure consistency of labelling with international debt issuance: for smaller countries in particular this will support access to internationally focused institutional investors.”
This recommendation ties in with the OECD's current work in relation to defining and measuring green FDI flows and on monitoring and tracking long-term finance to support climate action.
The report also had this interesting comment on pension funds:
“The incentives along (their) investment chain have become short-term and misaligned with the ultimate, long-term goals of the pension fund. Hence as institutional ownership has grown, the holding period of stocks has declined.Before pension funds can be expected to invest in green projects or financial instruments, they must be encouraged to once again act as providers of long-term capital.”
Sounds like something sensible from a Network for Sustainable Markets report. But is that really true? Can we afford to wait?
