Investing pensions to fight climate change

I’d argue the biggest challenge we have ever faced in the history of humanity is climate change. I’d also argue it’s the biggest opportunity for business and investors in the 21st century.

It is clear climate change is a very real, very present danger. Mark Carney, governor of the Bank of England, has flagged climate change as a “significant risk for global financial stability”. And in 2015, the Paris agreement set out meaningful goals: the world collectively agreed to limit global warming to a “two-degree scenario”.

However, as writer and broadcaster Dr Gabrielle Walker rightly points out, the world isn’t tracking to a two-degree scenario. We are, in fact, doing an excellent job of tracking to a six-degree scenario. And a six-degree scenario is catastrophic: droughts, floods, rising sea levels, food shortages, water shortages. And all this would be on a global scale. It is scary stuff, but it isn’t all doom and gloom.

Three reasons why pensions aren’t currently doing more

Many pension funds acknowledge climate change presents difficulties outside mere material risks; they are faced with a number of challenges. First, the language we use is jumbled: climate risk, sustainability, environmental, social and governance (ESG) factors, responsible investment, to name just a few. “Sustainable” might mean “environmentally friendly” for one person and “well governed” for another.

Second, there has been a proliferation of conflicting research and data, and a flood of information, resulting in decision-making paralysis even where the intention is positive.

Third, the asset management industry is not innovating fast enough. Yes, there are investment funds available and some have built ESG teams, but do they really give input on investment decisions? How well integrated is ESG across the asset manager’s holdings? There is a danger that as investors look for climate-aware investments, managers paint things to look greener than they are.

And for investors the big question remains how do you quantify the risks across a pension fund’s entire portfolio?

Most importantly, investors have the power to influence the outcome of this global crisis. One single investment, say £100 million, from a pension fund is a positive step, but it isn’t going to solve the problem.

Why use pension funds to fight climate change?

However, imagine a world where pension funds in the UK collectively allocate assets to support investments that combat climate change. Suddenly, you are talking about allocating trillions of pounds in assets. At this point, the world would have to pay attention. And on a global scale, it is tens of trillions of pounds in assets, representing significant influence.

Some of the larger UK pension funds are doing groundbreaking, cutting-edge work on sustainability. Their thought process, governance, insights and internal resources are impressive, and they are starting to drive change. But what about the thousands of smaller pension funds that do not have access to resources like this? What are they to do?

This is a challenge that no one individual, pension fund or organisation can solve on their own. The responsibility sits with the pensions industry, which collectively represents the long-term and retirement savings of everyone in society.

It is up to the industry to come together and create a playbook, available to everyone, that is easily accessible and easily implemented. This would help create an agreed set of processes, metrics, benchmarks or ideals for trustees to rely on to influence the discussions, decisions and changes needed.

I’d argue this is the key challenge of our generation. Get it right, now, and we help to create a sustainable and vibrant world. Get it wrong and we face horrible consequences.

It is time for the pensions industry to stand together to change the narrative and invest with the end in mind, directly addressing climate change. And ultimately, shaping the legacy we want to leave behind.