Climate Risk and Indian Pension Funds
Since Reserve Bank of India (RBI) published its discussion paper on climate risk for stakeholder consultation it is somewhat puzzling to notice that other financial regulators have not taken a similar approach to gauge the extent of climate risk in their respective domains. Climate risk, being a systemic risk, will impact the entire financial sector.
Let us take the case of pension funds. Globally, since the signing of UN Climate Change Conference (COP26), major pension funds such as the Ontario Teacher’s Pension Fund of Canada, the Danish ATP, APG of the Netherlands and pension funds in UK and the US are taking climate risk seriously. And why not—with roughly US$28trn (trillion) of assets, pension funds will be instrumental in financing the transition to net zero.
Extrapolating the global trends to India, climate risk has not featured in pension fund regulatory and development authority’s (PFRDA’s) agenda, if we survey the recent annual reports.
Following the spirit of RBIs discussion paper, the logical question to ask will be: what the exposure of Indian pension funds to climate risk and what should be the approach going forward, given the answers to the first question.
The answer to the first question can be approached from different angles. But, to begin with, unlike banks, pension funds are somewhat different as they undertake consumption smoothing while banks undertake maturity transformation. Within pension funds themselves, another difference arises in the way consumption smoothing is organised, that is defined benefit (DB) or defined contribution (DC), and this mix differs across geographies.
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