Events Recap

Forum on Pathways to NPS Net Zero by 2040

NPS net zero forum: "Climate-focused shareholder engagement needed to delay fund depletion"

[Business Post] "The National Pension Service (NPS) should declare net zero and pursue active climate-related shareholder engagement to deliver it."

That was the consensus among participants at the 'Forum on Pathways to NPS Net Zero by 2040', held on the afternoon of 18 April in Small Conference Room 2 of the National Assembly Members' Office Building in Yeongdeungpo-gu, Seoul.

The forum was hosted by Rep. Jeoung-ae Han of the Democratic Party of Korea and the Korea Sustainability Investing Forum to urge the NPS, Korea's largest public pension fund (KRW 916.9 trillion, approx. USD 705 billion, as of January 2023), to take climate action, including a "net zero declaration."

The presenters were Heeun Bae, Director at the Asia Investor Group on Climate Change (AIGCC); Taehan Kim, COO of the Korea Sustainability Investing Forum; and attorney Sejong Yoon of the climate and environmental group Plan 1.5. The panel discussion featured Jonghyun Won, Standing Expert Member of the National Pension Fund Management Committee; Seokho Son, Team Leader of the Social Policy Team at the Korea Enterprises Federation; Deokchan Yoon, CEO of Who's Good; Hongsun Song, Senior Research Fellow at the Korea Capital Market Institute; and Jongoh Lee, CIO of the Korea Sustainability Investing Forum.

At the forum, the Korea Sustainability Investing Forum and Who's Good, an AI-based ESG rating agency, also disclosed that the financed emissions of the NPS's domestic equity holdings exceed 27.1 million tonnes.

That figure covers only the 312 companies that disclose greenhouse gas emissions among the 1,168 Korean companies in which the NPS holds shares. Even on that limited basis, the NPS's financed emissions came close to 4% of Korea's national greenhouse gas emissions in 2021.

Financed emissions are the indirect greenhouse gas emissions associated with a financial institution's investments, loans, insurance and other financial assets. For example, financed emissions increase when a financial institution invests heavily in carbon-intensive companies.

Forum participants agreed that, to cut its financed emissions, the NPS needs to follow a net zero declaration with active climate-related shareholder engagement.

Rep. Jeoung-ae Han said: "The NPS invests in equities, bonds and alternative assets not only in Korea but overseas as well," adding: "The financed emissions arising across all of those assets are likely to be far larger than we expect." 

She argued that, in line with global trends, the NPS should establish a net zero strategy without delay and pursue active shareholder engagement.
"The Glasgow Financial Alliance for Net Zero (GFANZ), a net zero coalition of the world's major financial institutions, has also been launched and is now active," Han said. "Here in Korea, the role of the NPS cannot be overstated, and there is a growing consensus that, for the sake of a sustainable Korea, the NPS should play its full part as a shareholder in the companies it invests in."

Presenting at the forum, COO Taehan Kim said: "In 2021 the Network for Greening the Financial System (NGFS), a body of financial supervisors and central banks worldwide, also stated in a report that climate change can transmit into financial risk via the real economy," adding: "There is no disagreement within the financial sector that climate change is a real risk, but the NPS has been relatively slow to respond."
The NPS, which has yet to declare net zero, issued a coal divestment declaration in May 2021 but has still not established concrete coal investment restriction criteria.
Kim said: "The first priority is to measure exactly what the NPS's financed emissions are, and then to keep refining that measurement," adding: "Given that most private financial companies in Korea have joined the Partnership for Carbon Accounting Financials (PCAF) and are calculating their financed emissions, the NPS also needs to measure and manage its emissions systematically."

He continued: "The focus should also be on protecting and enhancing sustainable value through to 2040, when the fund is set to peak," explaining: "Climate action such as a net zero declaration can raise the fund's investment returns, and one estimate found that raising the average annual return by 1 percentage point would push back fund depletion by four years."
In March, the NPS Actuarial Projection Committee released the results of its Fifth Actuarial Projection, which found that if the National Pension system is left unchanged, the fund will peak in 2040 and be depleted in 2056, even under rosier fertility or economic assumptions. This is one of the grounds for setting the NPS's net zero date at 2040 rather than 2050.
Kim said: "That said, large-scale portfolio adjustments — such as pulling large amounts of capital out of particular companies to achieve net zero — are not realistically feasible for the NPS, so more active shareholder engagement is key to stable long-term returns."
He added: "The recent addition of 'climate change-related risk management' to the NPS's key stewardship focus areas is very encouraging. However, as a universal owner holding stakes in more than 1,000 Korean companies — an investor closely tied to the economy as a whole — the NPS should pursue stronger and more consistent shareholder engagement going forward."

Attorney Sejong Yoon emphasized shareholder engagement and, drawing on overseas cases, argued for climate-related shareholder proposals.

Yoon explained: "At companies such as Costco, Phillips 66, ExxonMobil and JPMorgan in the United States, climate-related shareholder proposals have passed, including proposals calling for the adoption of carbon neutrality targets and disclosure of implementation plans," adding: "In Japan, too, climate-related shareholder proposals calling for management strategies aligned with the Paris Agreement have become more active recently."
"Of course, Japan's climate shareholder proposals all failed, with support below 35%, but support of around 30% is a meaningful figure for climate shareholder proposals," Yoon noted.
At present, the right to file shareholder proposals is granted by law or by a company's articles of association. However, since the Commercial Act limits the scope of shareholder proposals to matters such as mergers and acquisitions, dismissal of directors and amendments to the articles of association, Yoon added that a way must be found for individual companies' articles of association to allow climate-related shareholder proposals.

Director Heeun Bae likewise argued that, compared with major overseas pension funds, the NPS needs to move faster and more ambitiously on net zero.
"Realizing net zero takes many steps and a great deal of time — the California State Teachers' Retirement System (CalSTRS) began developing its net zero plan as far back as 2004," Bae said. "The California Public Employees' Retirement System (CalPERS), the largest US pension fund, is actively pressing companies to deliver net zero and is working with them in a range of ways to carry out that strategy."
Some participants, however, pointed to the difficulties facing an NPS net zero declaration and shareholder engagement.

Jonghyun Won said: "The essential purpose and philosophy of NPS fund management is 'fiduciary duty.' ESG, including climate change, is one good 'tool,' but it cannot be an end in itself," adding: "Net zero is a very important value, but it is not something the NPS can achieve alone; it requires a discussion across the entire capital market."
Won explained: "Even though the NPS is a major shareholder in these companies, with stakes of around 10% it inevitably ends up playing the role of a minority shareholder. You can see this in its extremely low success rate when it has voted against management proposals."
He added: "Of course, I agree that climate change should be treated as a core risk for the NPS and that it should engage actively as a shareholder," but cautioned: "There is also a risk that a fixation on environmental issues could gloss over shortcomings in the other ESG dimensions — social and governance — where Korean companies are weak."
"Compared with major overseas pension funds, which have set 2050 as their net zero target date, the 2040 date being asked of the NPS strikes me as unrealistic," said Seokho Son. "Particularly when companies are struggling to source renewable energy in Korea, the burden should not be shifted onto companies and the NPS alone; we need to work out a path that can be implemented gradually."

Rep. Jeoung-ae Han, who co-hosted the forum with the Korea Sustainability Investing Forum, first brought 'NPS net zero' into public debate at last year's parliamentary audit, seeking to change the NPS's passive approach to cutting greenhouse gas emissions.
In January this year, she also introduced an amendment to the National Pension Act that would require the NPS to manage its financed emissions toward a long-term goal of zero and to report its reduction targets and progress to the relevant standing committee of the National Assembly.

The forum was also the first ever held on the theme of NPS net zero.

Business Post reporter Sangyu Jang @jsyblack@businesspost.co.kr

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