Carbon Bubble May Wipe $2.5 Billion Out of Polish Pension Funds

  • Polish pension funds face bigger risk than their EU peers
  • Study on carbon bubble commissioned by Greens in EU Parliament

The five largest pension funds in Poland may lose 4.2 percent of their assets if the European Union moves quickly toward clean energy sources and a “carbon bubble” of overvalued fossil fuel investments bursts.

The loss would amount to 2.3 billion euros ($2.5 billion) on 53.7 billion euros assets by funds owned by ING Groep NV, Aviva Plc, PZU SA, MetLife Inc. and AXA SA, according to a study commissioned by the Greens group in the European Parliament. That compares with an average weighted loss of 2.5 percent pension funds across the region, under the same shock scenario, the Amsterdam-based Profundo consultancy said in the research paper.

Poland, which depends on coal for more than 80 percent of its electricity, sees the most-polluting fossil fuel as the cornerstone of its energy security and is fighting for concessions in EU negotiations on climate laws for the next decade. The government’s strategy faces increasing criticism from environmental lobbies after almost 200 nations agreed in Paris last December on a landmark deal to rein in the greenhouse gases.

“The Polish coal industry is a financial disaster, and Polish pension funds are twice as exposed to such risky fossil fuel assets than the EU average,” said Reinhard Buetikofer, co-chair of the European Greens and a member of the EU Parliament. “This could end up costing taxpayers dearly.”

Robert Garnczarek, chief executive officer of AXA pension fund, said it was difficult for his company to comment on the findings of the report without knowing the detailed methodology behind classifying companies as high-carbon in the report.

“What matters is that for years we’ve had a consistent investment strategy, in which we attach great importance to protecting the capital in our pension fund,” Garnczarek said. “It proves to be working. For years we’ve been achieving one of the highest return rates for the future pensioners.”

Aviva declined to comment. ING and MetLife had no immediate comment.

The study’s basic scenario of a carbon bubble shock assumed “a quick and definite transition” to a low-emissions EU economy, resulting from a political action or a major technological breakthrough. Under that option, the value of investment in the shares of oil, gas and coal companies would drop by 60 percent while losses on exposure to credit facilities would reach 20 percent.

A collapse in global commodity prices is already hurting investment and pension funds worldwide. Crude oil tumbled about 70 percent over the past 18 months as turbulence in global markets added to concern over brimming stockpiles. Dutch natural gas for February is down 35 percent year-on-year and coal for delivery next year in Amsterdam-Rotterdam-Antwerp fell 33 percent.

Poland’s 12 pension funds oversee about 140 billion zloty ($34 billion) in contributions from almost half of the country’s 38 million people. A law introduced in 2014 stripped the funds of the ability to invest in government bonds, forcing them to keep a minimum of 55 percent in shares last year. Their performance is assessed in comparison to a benchmark based on WIG Index and the 3-month Wibor rate in, respectively, 80 percent and 20 percent.

Investment decisions by the PZU pension fund are taken based on fundamental analysis, which take into account internal and external factors affecting companies, including environmental, social and governance issues, the fund’s chief executive officer Andrzej Soldek said. The goal is to “maximize the expected return rate at an acceptable risk level,” he said.

The five biggest pension funds in Poland held almost 4 billion euros in stocks and corporate bonds of high-carbon companies at the end of 2013, according to the research paper by Profundo, with the weighted average 7.3 percent of their assets. The EU weighted average is 5 percent. 

The top five Polish banks -- PKO Bank Polski, Bank Pekao SA, Bank Zachodni WBK SA, MBank SA and ING Bank Slaski SA -- are less exposed to a carbon bubble shock than their EU peers. Under the basic scenario they would suffer average losses of 0.3 percent of total assets compared with 0.4 percent for the entire EU banking sector.

To reduce the impact of a bubble and be better prepared for a drop in the value of high-carbon assets, the Polish government could order a stress-test of financial institutions and create transition or exit strategies, according to the study. Other options for policymakers include introducing rules on disclosure, advancing a public debate on divestment, supporting low-carbon industries and focusing on research and development.

“There needs to be an ambitious energy transformation towards renewables and energy efficiency, which the study highlighted as the most cost-efficient option in dealing with the carbon bubble,” Buetikofer said.

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