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
Boermans, M. and Galema, R., 2019, Are pension funds actively
decarbonizing their portfolios? Ecological
Economics, online, accessed 20 July 2021
CCC, 2020, The UK's Net Zero target, CCC Insights
Briefing 3, Climate Change Committee, online, accessed 23 July 2021
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
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
Harvey, F., 2021, “Pension funds urged to help UK reach
net zero climate goals”, The Guardian,
5 May 2021, online, accessed 23 July 2021
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
Statista, 2021, GDP of the UK 1948-2020,
online, accessed 23 July 2021
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