Is your pension fuelling the climate crisis?

by | Apr 18, 2024 | Blog

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.

Sustainable investing is on the up and up

by | Feb 7, 2017 | Blog

Source: The Forum for Sustainable and Responsible Investment – Sustainable and Impact Investing in the United States Overview

Sustainable investing isn’t just for do-gooders. In Part 1 of this two-part series, we explore the growth of sustainable investing and discuss why smart investors are getting on board.

Sustainable investing is going mainstream. It’s no longer just about 350.org campaigning for fossil fuel divestment on college campuses, or a niche group of investors willing to sacrifice financial returns in favor of social and environmental impact.

Instead, it’s about savvy investors making smart decisions on where to put their dollars, taking the whole picture of a company, fund, or bond into consideration. And there are a lot of them. In November 2016, US SIF reported that more than $8.7 trillion of U.S. investments consider environmental, social, and governance (ESG) factors, up 33 percent since 2014. This is fully one-fifth of all professionally managed assets.

This number is only expected to grow as a new generation of investors takes over. According to research from Accenture, as baby boomers pass on their wealth over the next 30 years, more than $30 trillion in financial assets will change hands in North America. This new generation of investors is different. The Morgan Stanley Institute for Sustainable Investing found that millennial investors are more than twice as likely as other generations to invest in companies and funds that target specific social and environmental outcomes.

These investors aren’t in it for #allthefeels. The evidence is clear that sustainability has significant benefits for business performance. Companies that rank highly on resource efficiency produce better financial returns and stronger margins, returns on assets, and returns on equity. Moreover, a team of researchers from Harvard Business school showed in 2015 that firms that invest in managing their material sustainability issues have higher risk-adjusted stock performance than those that are less strategic about sustainability.

The Dinosaur in the Room

So let’s go back to the fossil fuel example. A smart investor doesn’t need to take up a personal crusade against climate change to pull back on fossil fuels. She can see that in time, the industry is bound to go the way of the dinosaurs.

    • Market Forces: Smart investors put their money in growth industries. Follow the jobs: the U.S. solar industry now employs more people than oil, gas, and coal combined, and saw growth of around 73,000 new jobs in 2016 alone.
    • Stranded Assets: Despite the current policy debates in the U.S., the 2015 Paris Agreement signals a path forward on climate at the global level. With China and India committing to carbon reductions, any investor that expects policy changes to limit carbon emissions down the road should be concerned about stranded assets. While a few years old at this point, the logic of Carbon Tracker’s 2011 Unburnable Carbon report still stands. The oil and gas sector may be vastly over-valued based on carbon reserves that, in the face of strict emissions caps, will become unburnable.
    • Governance and Transparency: The fossil fuel industry has no shortage of examples of scandal, lawsuits, and other risks. The revelations that Exxon Mobil deliberately misled the public and hid its research on climate change for nearly 40 years should be troubling to anyone who is paying attention. The company saw a risk to its own operations and swept it under the rug in the pursuit of profits. If a company can hide something that big, what else aren’t they telling investors?

With all this in mind, where would you put your money? If, like me, you hope to retire someday, you’ll make your bets outside of fossil fuels.

So how can businesses position themselves to succeed in a new era of investing? Read Part 2 of my blog – A company’s guide to sustainable investing –  to see how they can make the most of this growing trend.