A fierce debate has recently erupted in the Netherlands over the role of pension funds in the sustainability transition. While the pension funds themselves are increasingly aware of the impact of climate risks on their portfolio and the future of their pensioners, voices are heard from politicians and the financial sector that investing sustainably would interfere with the fiduciary duty.

To me it is crystal clear: the primary task of pension funds is to secure the best possible pension. This is why it is imperative to remove avoidable risks, especially those that harm other assets in the portfolio.

In October 2024, the European Securities and Markets Authority (ESMA) sent a clear message: "It is important for fund managers to identify and proactively manage the potential risks stemming from climate change". This has been repeated and emphasised by Dutch regulator AFM, in its recent 2025 agenda: "Adequate management and integration of sustainability risks into business operations and investment policy remains important".

Mitigating climate risk is best practice investing. This is not open for debate. It has been mandated. And those who advocate otherwise are going against regulators and also against the best interests of clients. The obvious way to mitigate climate risk, is to stop investing in it.

Remove the assets infecting the whole portfolio

Soon-to-be-stranded assets like fossil fuels are not just a transition risk. The 37 billion metric tonnes of carbon emissions they produce annually also pose a physical risk for other assets in the portfolio.

According to ESMA, across diversified portfolios, funding fossil fuels heightens the physical risks of food and water scarcity, climate-induced death, infectious diseases, ecosystem collapse, flooding, droughts, extreme weather changes, energy generation capacity loss and rising sea levels. Quite a list.

Sure enough, fatal weather events are increasing, like the DANA rainfall which killed 219 people around Valencia this winter. Climate and biodiversity risks hit all assets in a portfolio, from agriculture to utilities. Just ask insurers. 2024 saw record global climate-related losses of USD 140 billion and counting.

Significant research and academic studies find we're teetering on a knife-edge of irreversible environmental and social tipping points. The far-reaching financial consequences of this will not leave equity markets unaffected, as my colleague Hans Stegeman rightfully highlighted. As an investor, you need to include this in your investment decisions.

Fiduciary duty means preserving pension holders' homes 

Providing the best possible pension means factoring in the life, interests and wishes of the individual, or as it is more commonly known, this is the fiduciary duty. The Dutch Federation of Pension Funds mandates in its code that pensions must consider, the "possible long-term effects of the investment policy on people, environment and society and the effects of sustainability risks on investment decisions".

With so many homes below sea level, the Netherlands are especially vulnerable to climate risk. ABN Amro found that 900 Dutch neighbourhoods are on the brink of plunging into financial ruin. Do you think that these pension holders would be happy to invest in assets which increase the risk of their homes becoming uninhabitable?

My personal belief is that firms who do not mitigate against climate risks may face reputational and legal challenges later. Especially as regulators are providing clear climate risk guidance, and the pension holders themselves are demanding change.

The majority is demanding change 

Research found that 69% of workers are concerned that their pension is funding fossil fuels. And, honestly, is anyone surprised? What 30-year-old professional wants to invest in an asset that will erode their future and become stranded a few years into retirement? That would be reckless and irresponsible.

Even if the headlines suggest otherwise, a social tipping point is near. A recent study found that more than half of US citizens are more worried about climate change than ever before, while two-thirds of them believe sustainability should be the 'default' for companies. The dial is moving, whether certain people want to see it or not. For those who continue to force people's pensions into fossil fuels, you are on the wrong side of history.

De-risking means excluding

An excuse often brought forward by the opponents of pension funds investing sustainably is that it could lead to gaps in diversification. I must frown when I hear this, because from where I am standing the opportunities for climate safe investments are plentiful and vibrant. Also, diversification is not helping your risk management if it makes you unconsciously include avoidable risks in your portfolio.

In my opinion, fossil fuels have become what Warren Buffet termed a "last puff" investment. Sure enough, there is a final squeeze of profitability left before the industry collapses. But at what cost? At the cost of risking the entire portfolio. Now is the time to be de-risking.

It's not about politics. It's about good investing

The risk of climate change and biodiversity loss will shake the foundations of our investment portfolios. Not having a clear vision on how to address those risks is – in every sense of the word – bad investing.

It's not a matter of political preferences. It is about re-opening our investment textbooks and following modern portfolio theory correctly. We must mitigate against unnecessary risks, while ensuring diversification across asset classes, geographies, and sectors. Not short-term gambling, but best practice investing with a long-term horizon.

This column was originally published in Dutch on IEX Profs.