If you’re reading this blog post, the chances are you probably care about protecting our planet from climate change.
You are also probably already aware of the fact that if we continue on our current track of pumping vast amounts of carbon out into the atmosphere, we’re extremely unlikely to meet the 2016 Paris Climate Change Agreement goals of limiting the increase of global average temperatures to 1.5°C above pre-industrial levels.
To stay below a 2°C increase, global greenhouse gas emissions would have to reach their peak within the next 10 years and then decrease by a minimum of 80% by 2050 .
So without big changes and fast, by 2100, we (or more likely our offspring, unless we live to be incredibly wrinkly old prunes) will be living in a world with average temperatures that are 4°C warmer .
Now, without wanting to be the Debbie Downer of your day and ruining what you intended to be a nice, relaxing coffee-break in wintery December… that would mean devastating extreme weather events, biodiversity collapse, population displacement, loss of life and heavy economic losses around the entire world.
To prevent this apocalyptic vision from becoming a reality, we urgently all need to play a part in pushing for change. One less obvious CO2-contributing-culprit that you may not have considered yet is your pension...
Do you know where your money is being invested?
According to the Make My Money Matter (MMMM) Campaign, private pension wealth investment in the UK amounts to around £3 trillion .
But do you know where your pension money is invested? Investors and financial institutions channel billions each year into corporations engaged in damaging environmental practices such as fossil fuel extraction and unsustainable soy, palm oil, rubber and meat production.
Many pension funds do not disclose much detail about what they invest in and the sorts of activities that they are providing funding, so you may need to do a bit of detective work…
ShareAction is a UK civil society organisation that encourages investors to drive positive change in corporate behaviour by focusing on the long-term impact they have on the environment and society. Their "Asset Owners Disclosure Project on Pensions and Changing Climate" ranks the world’s 100 largest global pension funds on their approach to climate-related risks and opportunities .
Their 2018 report found that…
· Over 60% of pension funds publish little or no information on their climate responses, placing them at risk of breaching their legal duties to their beneficiaries.
· Only 10% of funds have a formal investment policy that seeks alignment with the goals of the Paris Agreement.
· Only 24% of funds disclose and quantify their low-carbon investments, with analysis revealing a fragmented and inconsistent approach to measuring and reporting.
Improving disclosure is a key first step
If the government does act in order to stay in line with the Paris Agreement rather than going for the Disastrous-Unchecked-Global-Warming Option, then pension funds invested in high-carbon companies and projects will likely become “stranded assets” and rapidly start to decline in value.
But simply requiring better disclosure from pension funds could also kick start this process. Stringent policy and legal measures that require financial institutions to disclose their portfolios’ carbon emissions will encourage managers to divest and divert their funds towards greener options that support decarbonisation and climate change mitigation and adaptation.
Only with better disclosure can individuals audit whether money managers are pursuing sustainable investment behaviour. Individuals should have the necessary information and ability to redirect their pension to investment funds that can demonstrate a commitment to sustainability.
“Only with better disclosure can individuals audit whether money managers are pursuing sustainable investment behaviour.”
Sustainable investing is already growing across the world
The good news is that sustainable investing does seem to be catching on slowly but surely…
🇫🇷 In 2015, France introduced mandatory regulation to make all pension funds disclose not just their financial risks but their carbon risks. This pushes them, and the companies they invest in, to address their impact on global warming.
🇪🇺 In 2018, the European Commission released a landmark Action Plan on Financing Sustainable Growth which claims to: reorient private capital to more sustainable investments both within Europe and in the Global South, mainstream sustainability across investors’ risk management and foster transparency and long-term thinking in financial and economic activity .
🇺🇸 In the US, net flows into sustainable funds grew exponentially in 2019 reaching $20.6 billion which was more than four times greater than the previous annual record .
🇳🇴 Meanwhile in Norway, in 2019, the Government Pension Fund Global (GPFG) sold billions of dollars’ worth of stakes in over 60 companies due to their involvement in deforestation.
🇬🇧 This year, the UK’s biggest pension fund, the government-backed National Employment Savings Trust (Nest), which has nine-million members, announced it would start to divest from fossil fuels by boycotting companies engaged in coal-mining, oil extraction from tar sands and Arctic drilling . They have said that in line with a green economic recovery from the pandemic, they will transfer £5.5 billion into “climate aware” investments.
“This year, the UK’s biggest pension fund announced it would start to divest from fossil fuels by boycotting companies engaged in coal-mining, oil extraction from tar sands and Arctic drilling”
⛪ And in 2018, the Church of England voted to divest by 2023 from oil and gas companies not on track to meet the Paris Agreement .
What influence can individuals have?
These are all important steps and the first signs of incredibly exciting progress, but there is still so much work to be done…
We need strong leadership, watertight regulation, clear policy and mandatory reporting and transparency.
But we also need collective action. As individual pension owners, you also have immense potential power. Pension funds are a crucial but often overlooked lever for systemic change.
The introduction of automatic pension enrolment in the UK has seen over 10 million more people enrolled into pension schemes  since 2012. Many of these new enrollees are in their twenties and will not begin to draw from their funds for many decades to come. Pension funds hold a legal obligation to act in the best interests of these young savers and therefore have a responsibility to invest sustainably with a low-carbon future in mind . This requires a shift from a myopic focus on short-term profit to a longer-term, environmentally-conscious perspective.
“Pension funds hold a legal obligation to act in the best interests of these young savers and therefore have a responsibility to invest sustainably with a low-carbon future in mind”
Believe it or not, moving to a more sustainable fund can have 27 times as much impact on reducing your carbon footprint as giving up flying and becoming a vegan combined !
So if you have 15 minutes to put aside, why not look into how to use your leverage to demand higher environmental standards from your pension fund.
If you’re an employee, ask your employer to provide full details on your pension provider. If you’re an employer, be vigilant about which pension schemes you choose for your company.
ShareAction hosts regular e-actions to help individuals to contact their pension funds about their concerns. This in turn helps to nudge pension fund managers in the right direction towards investment decisions that more accurately reflect their clients’ core values.
As an investor you can hold your pension fund accountable for unsustainable financial activity; lobby them to place pressure on the companies they hold shares in to change their corporate behaviour and help to push them towards decarbonising their operations and becoming environmentally sustainable in line with the 2016 Paris Climate Change Agreement.
Sustainable investment has the potential to benefit all parties, but beware greenwashing!
Being sustainable and investing in Environmental, Social and Governance (ESG) funds does not mean slamming the brakes on economic growth or taking a hit to your pocket.
Sustainable development, as defined in the 1987 Brundtland Report , means "development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
Sustainable investment isn’t just good for the planet, research clearly shows that it's good for business too . In fact, ESG funds in recent years have shown higher cash flows, lower idiosyncratic risk and higher valuations.
In the quest to seek out sustainable investment, however, it is important to be wary of greenwashing. Sometimes funds can be misleading by simply talking about climate change rather than taking genuine action against it. Also, many companies repeatedly commit to significantly reducing or eliminating carbon emitting and deforesting operations yet fail to meet their targets. Hopefully, mandatory carbon risk labelling on investments of pension fund portfolios will put an end to this, but for now, it’s good to stay on your toes.
A pension should be about investing in the future. It is vital that we shift our money away from sectors that are not moving us towards a low-carbon economy. To quote the British writer and environmentalist Jonathon Porritt: “The future will be green, or not at all.”