Pensions and climate

 

The cost of meeting the UK’s net zero greenhouse gas target has been estimated by the Climate Change Committee “on conservative assumptions” at “up to 1-2% of GDP” in the years to 2050, when the annual cost would reach about £50 billion (CCC, 2020). The gross domestic product of the UK has been estimated for 2020 as “1.96 trillion British pounds, a fall of approximately 216 billion pounds compared to 2019” (Statista, 2021).  Fiona Harvey wrote in The Guardian that the “UK pensions sector accounts for about £2.6tn in funds” and noted the potential influence of these funds on investment and business should they invest in “lower-carbon portfolios” (Harvey, 2021).

In view of the size of pension funds, it is not surprising that some pressure groups have sought to influence the ways in which they are invested. One such group is Make My Money Matter which describes itself as “a people-powered campaign fighting for a world where we all know where our pension money goes, and where we can demand it’s invested to build a better future.” The campaign hopes to move pension fund investments towards fulfilling sustainable development goals, and includes clean energy, green transport and reforestation in its target list. (MMMM, 2021).

The aims of those seeking to direct pension funds in the UK towards green investments may be furthered by the progress of the Pension Schemes Act 2021. Christine Scott wrote that this “new Pension Schemes Act received Royal Assent in February this year, following a protracted journey through the UK Parliament as a consequence of the pandemic.”  The provisions of the Act include climate change governance and reporting, and there are proposals that would require occupational defined benefit and defined contribution pension schemes with assets of over £1 billion “to establish specific governance arrangements to manage climate-related risks and to produce Task Force on Climate-related Financial Disclosures”. These TCFD reports would have to be made public, and new regulations for the larger occupational schemes “are expected to come into force from October 2021” (Scott, 2021).

On the global scale, preliminary “data for 2020 show that pension funds held over USD 35 trillion of assets worldwide at end-2020” (OECD, 2021). In 2018, a report on 100 pension funds around the world concluded that “Over 60% of funds have little or no approach to climate change” (AODP, 2018). An attempt to compare the effect on climate of changes of lifestyle with changes in savings was made by Nordea Invest, and a numerical ratio calculated. Nordea points out that the “purpose of this calculation is to give substance of thought” and that while it has concluded that for some people changes in total savings over a lifetime can have a much bigger effect than changes in lifestyle, it has no wish “to undermine other activities that promote sustainable development or limit greenhouse gas emissions, but to express the importance of considering your climate impact through savings” (Nordea, n.d.). 

An article in The Conversation points out that people “can end up in an absurd situation where they are willing to make significant lifestyle changes to reduce their carbon footprint” but have no idea whether companies contributing to high carbon emissions “feature predominantly in their retirement or employees savings-investment portfolio.” The article points to the difficulty of knowing how money in pension funds is invested since “many of the financial service providers that manage pension funds do not provide this level of financial reporting”, but refers to the actions of some investment groups fighting climate change “through disinvestment from fossil fuels”, to government action on corporate social responsibility in France and to the UK’s Pension Schemes Act (Conversation, 2020).

The Guardian points out that some “big pension funds have already committed to the green pensions charter principles, including Scottish Widows, Aviva, Nest, the BT pension scheme, and some local government pension schemes”, claiming that about £400bn is now invested in schemes “that are aligned with the net zero and 2030 targets.” (Harvey, 2021)

Writing in the Financial Times, Josephine Cumbo (2021) indicates the rapid recent growth of funds invested on environmental, social or governance (ESG ) principles, with net assets in UK-domiciled ESG funds rising from “£29bn at the beginning of 2017 to £71bn by the end of 2020”. She quotes the research of a positive impact investing advisor claiming that “moving a £100,000 pension pot with a traditional portfolio with oil and gas companies to a positive impact portfolio is the equivalent of taking five or six cars off the road a year”. (As with the article from Nordea, this comparison is perhaps “to give substance of thought” rather than any more precise indication.) Cumbo goes on to give a useful guide (with warnings) to some of the jargon surrounding investment, such as ethical exclusion, responsible practices and sustainable solutions (Cumbo, 2021).

Davidson (2020), writing in This is Money, offers advice on green investment in general, with a warning from Mark Carney that “pension funds and businesses risk seeing their assets become worthless unless they wake up to the climate crisis.” There is a section on Green Pensions, referring to company schemes, switching providers, the launch of a new green UK pension fund, and self-invested personal pensions.

Berg (2021) examines the question of harnessing finance capital to promote green transformation, and regards public pension funds as particularly interesting “since they are publicly governed, have long-term interest, and are growing in proportion to the global investment capital.” She “identifies shifts in value judgments in public pension fund investments” and focuses on resistance to change. While public pension funds offer “new possibilities for humanizing capital in the global market and rendering it more sustainable”, they are hindered from doing so by “the professional culture and its economic rationale within funds” which serves to neutralize their political role. Funds are guided by financial goals and their economic and technocratic rationale serves “to avoid explicit value judgements … which excludes deep green transformation”. Capital has been anonymised, but public pension funds have the potential to decrease the distance “between investment decisions and the affected people”.

Boermans and Galema (2019) studied “whether investors are actively decarbonizing their portfolios”. They analysed stock-level holdings data of Dutch pension funds over several years and investigated “whether more actively managed pension fund portfolios have a lower carbon footprint”; the way in which funds made carbon footprint reductions; aspects of measuring and disclosing carbon footprints; and how reductions in carbon footprints affect risk-adjusted performance. They concluded that pension funds with higher active share management have lower carbon footprints; that “actively managed pension funds that measure and report their carbon footprint accomplish greater reductions in their carbon emissions” and that this is “mostly driven by divestments from firms in industries associated with high carbon emissions”. Their work “suggests that active decarbonization does not impair investors’ financial performance”. However divesting from carbon-intensive industries “may only have limited impact on the transition towards a low-carbon economy” and pension funds wishing to have greater impact “could benefit from having more concentrated portfolios that are more actively managed”. The writers comment on the limitations on researchers and investors imposed by the restricted “quality and availability of carbon emissions data”.

Rempel and Gupta (2020) list five ways in which pension funds seek to implement climate policies: divestment; direct engagement; carbon footprint calculations; investing in ‘green’ alternatives; and engaging in climate oriented coalitions. The writers describe these actions as “so far ineffective and counterproductive to taming the fossil fuel sector.” Based on a sample of pension funds, they suggest that within the OECD, pension funds probably manage “several hundreds of billions of euros in liquid fossil fuel assets, possibly within the range of €238–828 billion.” They believe that the funds “are not yet fully committed to LFFU” (Leaving Fossil Fuels Underground) and that this hampers the prospects of limiting climate change and also “threatens the prospects of socially, ecologically and relationally inclusive development”.  Of the five methods of implementing climate policies, the first four are not being used effectively, and climate oriented coalitions have yet to reach their full potential. A discussion of the dilemmas facing pension funds follows: one of the issues is that “pension funds are taking impactful action to address the climate emergency at the expense of their own pensioners, because they are inevitably left with financial losses in the form of stranded assets on their own balance sheets.” The authors note that a “traditional view of fiduciary duty neglects to account for the future, long-term risks that pensioners are exposed to” from climate change and likely recession, and that true, long term fiduciary duty would imply action on LFFU “while simultaneously limiting portfolio risk exposure.” They regard it as critical that pension funds and other investors “maximise their leverage over fossil firms to phase out fossil fuels” and “catalyse a process to write-off stranded fossil fuel assets on their own balance sheets so as to maintain global economic stability”.

 

References

 

AODP, 2018, AODP Global climate index 2018/ Pension funds, Asset Owners’ Disclosure Project, website, accessed 24 July 2021

https://aodproject.net/changing-climate/

Berg, M., 2021, Value Judgments at the Heart of Green Transformation: The Leverage of Pension Fund Investors, Global Environmental Politics, online, accessed 20 July 2021

https://direct.mit.edu/glep/article/doi/10.1162/glep_a_00613/102801/Value-Judgments-at-the-Heart-of-Green

Boermans, M. and Galema, R., 2019, Are pension funds actively decarbonizing their portfolios? Ecological Economics, online, accessed 20 July 2021

https://www.sciencedirect.com/science/article/pii/S0921800918314861?casa_token=Bl0hHMcM9VwAAAAA:p9jI35TFEL-06BV2fPDIuU7bde-1-p2ikGfBavenaMvX7ZwA1Mq5fy_mY9HlfrvBO4ZnJEhr

CCC, 2020, The UK's Net Zero target, CCC Insights Briefing 3, Climate Change Committee, online, accessed 23 July 2021

https://www.theccc.org.uk/wp-content/uploads/2020/10/CCC-Insights-Briefing-3-The-UKs-Net-Zero-target.pdf

Conversation, 2020, Your pension has a huge role to play in combating climate change – here’s how to make it sustainable, The Conversation, July 16, 2020, online, accessed 26 July 2021

https://theconversation.com/your-pension-has-a-huge-role-to-play-in-combating-climate-change-heres-how-to-make-it-sustainable-132062

Cumbo, J., 2021, How green is your pension? Financial Times, 26 Feb. 2021, online, accessed 23 July 2021

https://www.ft.com/greenpensions

Davidson, S., 2020, The big green investing guide: How to make your pension and investments more environmentally friendly, This is Money, 15 Oct. 2020, online, accessed 24 July 2021

https://www.thisismoney.co.uk/money/diyinvesting/article-8820103/How-make-pension-investments-green.html

Harvey, F., 2021, “Pension funds urged to help UK reach net zero climate goals”, The Guardian, 5 May 2021, online, accessed 23 July 2021

https://www.theguardian.com/environment/2021/may/05/pension-funds-urged-to-help-uk-reach-net-zero-climate-goals

MMMM, 2021, Make My Money Matter, website, accessed 23 July 2021 https://makemymoneymatter.co.uk/

Nordea, n.d., How we calculated the 27x efficiency on sustainable savings, Nordea Invest, online, accessed 24 July 2021

https://nordeainvestmagasinet.dk/sites/default/files/inline-files/Regnestykke-baggrund.pdf

OECD, 2021, Global pension statistics, OECD website, accessed 24 July 2021

https://www.oecd.org/daf/fin/private-pensions/globalpensionstatistics.htm

Rempel, A. and J Gupta J., 2020, Conflicting commitments? Examining pension funds, fossil fuel assets and climate policy in the organisation for economic co-operation and development (OECD), Energy Research & Social Science, online, accessed 20 July 2021

https://www.sciencedirect.com/science/article/pii/S221462962030311X

Scott, C., 2021, Implementation of the new Pension Schemes Act 2021, ICAS, online, accessed 24 July 2021

https://www.icas.com/professional-resources/pensions/implementation-of-the-new-pension-schemes-act-2021

Statista, 2021, GDP of the UK 1948-2020, online, accessed 23 July 2021

https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom/

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