Unpacking pension-climate governance: the finance-climate governance nexus and its implications for pension fund climate action and fossil fuel phaseout

Abstract

Abstract Through the Paris Agreement’s commitment to making financial flows consistent with emissions reduction pathways, large institutional investors, including pension funds, have been implicitly conscripted into efforts to leave fossil fuels underground. Yet despite the attention to finance from international climate agreements, finance continues to fund fossil fuel expansion. Drawing on the emergent literature on finance-climate governance interactions, I explore how the intersection of these governance regimes impacts a specific actor (pension funds) and a specific issue area (management of pension fund fossil fuel assets). By analysing policy documents and voluntary investor initiatives, I map the multi-level institutional arrangements governing major pension funds in the US, UK, and the Netherlands across three governance regimes: pension governance, climate governance, and sustainable finance governance and make use of the governance stringency framework to compare the ways governance arrangements shape pension climate action and their contribution to phasing out fossil fuels. Climate governance has normatively linked financial action and climate mitigation, yet adopted no mechanisms to shape investor behaviour, while conversely, pension governance has integrated attention to climate to the extent that it poses financial risk, shifting the attention away from aligning financial flows towards managing climate risk. Prescriptive governance for pension climate action and its management of fossil fuel investments has been dominated by voluntary sustainable finance initiatives. While these fill important governance gaps, resolving the tensions between climate goals and pension regulation is something policy will need to address to take seriously the challenge of aligning financial flows with climate goals.