Pensions sector edges towards a global climate role

At the same time, gloomier analysts warn that a great recession is coming and that the authorities lack the tools needed in order to mount an effective response. It is easy to be absorbed in the daily drama.

For all that, by the start of October, most stock markets had performed fairly well in the year to date, after a pretty difficult 2018. There are — as always- plenty of storm clouds around, metereological as well as financial. Argentina is close to a default on its debt yet again. Turkey continues to look shaky.

A hard, or ‘no deal’ Brexit looms threatening our own economy. Even mighty Germany appears to be entering recession as its auto industry stutters and its great customer, China enters a new phase of slower growth.

High tech company flotations are suddenly out of fashion, with big names such as the taxi ride firm Uber and the office firm We Work struggling to attract investor interest.

Yet the Dow Jones Index had risen 15% in value by late September with the Nasdaq up over 20%. Somehow, those animal spirits cannot be quenched. 2019, however, is likely to be remembered as the year when the issues around climate change entered centre stage.

Four years on from the Paris conference, concerns about often catastrophic ‘climate events’ mount. Last year, for example, Puerto Rico was flattened. This year, it was the turn of the Bahamas to face the worst storm event ever.

Ordinary people are responding. Children point the finger at their elders. Massive ‘Extinction Rebellion’ marches have been taking place at regular intervals, with half a million mainly young people turning out in September in Montreal, Canada, to hear the diminutive 16-year-old Swedish activist, Greta Thunberg, fresh from her fiery address at the United Nations climate conference. Across Europe, the Green party made significant progress in various election contests, making big gains in Ireland, Germany and Austria, among others.

The party has emerged as a major force in the European Parliament following elections in May. The pensions industry is being forced to come to terms with this new reality. It is doing so — with some reluctance.

Last November, the Financial Times reported that just 5% of the UK’s biggest corporate pension funds — collectively overseeing almost £500bn in assets — had put in place a policy on climate change.

The article quoted research from the law firm, Pinsent Mason, suggesting that many trustees remain uncertain regarding what action they should be taking. The law firm interrogated 43 firms in order to find out how many had in place a target for investing in low carbon, energy efficient or sustainable assets.

The group was also adjudged to lack specific decarbonisation targets with respect to their investment portfolios. This meant that it was unclear as to how many — if any at all — had divested from firms engaged in carbon intensive activities such as coal mining.

Governments have begun to pressure the industry. In Britain, the Department of Work and Pensions has announced a new set of rules requiring trustees to justify neglect of environment, social and governance issues.

There is of course a fair bit of ‘green wash’, or PR driven posturing around the place. Three quarters of companies have mentioned climate change in their published strategy documents, but few go into specifics.

Many in the global pension fund community continue to view the challenges posed by climate change as those around values and ethics when, in reality, what we are talking about is hard investment risk.

A regulatory response is beginning to form as politicians grasp the scale of the threat.

In Britain, the House of Commons Environmental Audit Committee, chaired by the Labour MP Mary Creagh, has called for the City of London to face mandatory climate reporting within three years so as to ‘avoid jeopardising hundreds of billions of pension savings.’

The MPs called on the government to clarify the law to the effect that pension funds have a duty to take into account long-term environmental risk.

Says Ms Creagh:

Climate change poses financial risks to a range of investments from food and farming to infrastructure, construction and the insurance industry.

Yet the concern is that the financial/investment sector is ‘structurally incentivised to prioritise short-term profit rather than focus on long-term issues.’ The problem is that the long-term, these days, is being transformed into the short-term as climate events gather momentum.

The outgoing governor of the Bank of England joined forces with his French counterpart, Francois Villeroy, to urge global regulation aimed at curbing the growth in carbon and methane emissions. The pair called for a ‘massive reallocation of capital’ in order to keep global warming below the level of 2% — the maximum limit set in the Paris Agreement. The governors believe that if such steps are not taken, a staggering twenty billion dollars in assets could be wiped out.

Such views are echoed by many within the US Democratic party who know endorse a ‘Green New Deal ‘ involving massive investment in infrastructure and activities aimed at promoting decarbonisation. These views have been backed by the front runners in the race for the US presidential nomination.

A major stumbling block exists in the form of the great climate change denier, Donald Trump. However, the evidence is that across the world, awareness of the need to introduce fundamental change in the way we operate is growing.

In Ireland, moves to increase carbon taxes are afoot while the Government has announced plans for a new interconnector which would allow for France to supply Ireland with energy and vice versa. What is clear is that the pensions fund industry cannot ignore such trends. Asset managers will have to innovate.

More pension funds will have to establish dedicated environmental teams and the industry collectively will have to fund investments in new projects which are aimed at decarbonising our economy.

Some believe that a flood of data — some of it contradictory — is promoting paralysis when it comes to decisions in investments. Yet there are plenty of opportunities for profit awaiting those who are willing to take risks.

The pensions industry — with its focus on long term returns — can take a leading in guiding the financial markets with their focus on the short term in a direction that accords with the long term interests of society. After all, if we let the planet go ahead and cook, we will all suffer.