Pensions, which are designed to secure our future, may be putting it at risk. These powerful funds — worth more than US$55.7 trillion in global assets and accounting for 69% of GDP across 22 major markets — are quietly funding the climate crisis through major investments into fossil fuels (as Oblivia Colemine chillingly informed us) and deforestation. Ironically, these investments are jeopardising the future we are saving for. But it doesn’t have to be this way.
Pensions fund fossil fuels. £3 trillion is currently invested into UK pension funds. More than £88 billion is invested in fossil fuel companies, the biggest contributor to climate change and accounting for more than 75% of global emissions. In 2021 and 2022, Local Government Pension Scheme (LGPS) funds had invested £16 billion in the fossil fuel industry, according to research by Platform and Friends of the Earth. This money not only funds existing oil and gas projects, but supports expansion. More than half of LGPS funds in the financial year 2021-2022 went into new oil and gas projects. Pension fund bond investments also drive the funding of fossil fuels. Bonds are fixed-term loans that investors provide to governments or companies that underpin the financing. 50% of fossil fuel financing comes from corporate bonds, and bonds account for the largest source of financing for coal in China and India, according to the Toxic Bonds Initiative.
Pensions may drive deforestation. In the UK, more than £300 billion of pension fund investments go into companies with a high risk of driving deforestation. These include companies involved in palm oil, soybeans, beef and timber. For every £10 put into a pension, £2 could be linked to companies causing deforestation. Deforestation poses a major threat to the natural world, contributes significantly to climate change and can be linked to serious human rights abuses. More than a quarter (27%) of deforestation results from agricultural products. These agricultural commodities are also exposed to physical climate risks such as extreme weather events, droughts and rising mean temperatures, potentially making them risky investments.
Pensions can be part of the solution. People eat less meat, switch energy providers and travel less to cut their carbon footprint, but they don’t typically think about their pensions. Instead of funding companies that are damaging the environment, pensions could be part of the solution. ‘Green pension funds’ aim to generate returns for people by investing in companies that have a positive impact on the environment. If UK consumers were to collectively participate only in green funds, up to 386 million tonnesof greenhouse gas emissions could be eliminated each year, according to the Scottish Widows 2023 Green Pensions report — the equivalent of 11 return flights from London to New York per person. Pensions represent a substantial investment pool for already available climate solutions, such as technology-based carbon removals and innovative renewable energy projects. These solutions are in desperate need of funding to scale up quickly. They have the power to significantly reduce and drawdown (when emissions stop rising and start to decline) global emissions. By moving their money, people and pension providers can play a pivotal role in addressing the causes of climate change whilst driving the transition to a low carbon economy. UK pensions alone have the potential to invest £1 trillion in climate solutions, like renewable energy, by 2035. Organisations like Make My Money Matter are on a mission to encourage people to ask pension providers to go green by moving investments away from companies funding fossil fuels and driving deforestation.
Some pension funds are already making a difference. Some funds are moving away from investing in fossil fuel and high emitting companies. Netherlands-based PFZW, one of the largest pension funds in Europe, announced that it has exited investments in over 300 fossil fuel companies, including Shell, BP and TotalEnergies, over a lack of convincing decarbonisation plans. The Church of England Pensions Board, which manages roughly £3.2 billion, said it will exit the oil and gas sector, along with some of the highest emitting industries such as airlines, utilities and steel companies.
Despite some changes, progress is slow. It will take a global effort from multiple parties to change the pension industry. Governments can tighten legislation on pension providers. Funds can be more transparent about their investments and diversify away from industries fuelling the climate crisis. People can speak to their pension provider (directly or via their employer) to find out where their money is going. Once they know the full story, they can decide whether their current pension plan matches their values and understand the other investment options available to them, along with any associated risks.
The purpose of a pension is to invest in our own future. But the pension itself could be damaging that future. The choices we make over where we put our money gives us more influence than we realise. We can use our savings to support a greener, cleaner and healthier future for all.
