Articles - Climate change presents huge opportunities for pensions

The risks that the climate crisis presents for pension schemes are often discussed, but with 6 months before the UN Climate Change Conference (COP26) in Glasgow it’s worth reflecting on how much is being done by pension schemes to seize the opportunities, and what more could be done. The sources of green energy - the sun and wind - are free, but the infrastructure necessary to turn that energy into electricity, and deliver it to where it’s needed, is not.

 By Dale Critchley, Policy Manager at Aviva
 Offshore wind turbines, with blades longer than the wingspan of any airliner, generating gigawatts of electricity, into a grid that can deliver power to homes and industries, demands huge capital investment. A report by the International Energy Agency (IEA) in May this year estimated that by 2030, just 9 years from now, we’ll need to be building wind and solar power at around 4 times the current rate. The annual investment in clean energy will need to be £4trn, around 3 times the average over the past 5 years.

 At the same time, investment in old technology will need to reduce and will be replaced. The G7 have committed to placing limits on coal, a decision that won’t have gone down well in the coal fields of Saxony and Wyoming. The IEA report predicts that the global market for coal will decline to less than half of current levels over the next nine years, with the market for copper quadrupling over the same period. Markets for Lithium, Nickel, Graphite and Cobalt are similarly expected to soar in the face of a low carbon revolution and 60% of new cars will need to be powered by electricity in 2030.

 There is an argument that markets will reflect the likely winners and losers in the transition to a low carbon economy, and that the risk is priced into those markets. That’s not an opinion shared by many however, and there are signs that activist investors are looking to intervene where they see inactivity on environmental issues casting a cloud over company performance. Engine No. 1, a US activist investor, has recently installed three Directors onto the Exxon Mobil board, citing a lack of planning for a low carbon future as the reason for their intervention. Their aim is to secure shareholder value in a world economy based on clean electricity, not necessarily to shift the needle on climate change.

 So, what does all this mean for pension schemes? The primary role of trustees and pension scheme providers is to provide returns for their scheme members. The scale of investment in new economies presents a huge opportunity to invest scheme assets directly in the low carbon infrastructure that’s going to be required. It’s an opportunity that’s been recognised by government and reflected in a focus on enabling greater investment of pension assets in illiquid investments. While there’s work to do to enable meaningful illiquid investment in DC pensions the opportunity is clear.

 Active management and stewardship present further opportunities. The collective investments of UK pension schemes total around £2.524 trn , providing trustees and fund managers with the leverage to influence the direction of company boards where they don’t see a clear plan to flourish. Policies on stewardship offer an opportunity to generate greater returns for members and shape the future direction of the companies that our pensions are invested in.

 Away from direct engagement there’s an opportunity for the pensions industry to take a lead in promoting investment in a low carbon future. Aviva’s commitment to achieve net zero by 2040 has been followed by others. We’ve also recently announced a partnership with the World Wildlife Fund (WWF). While this relationship might not be immediately obvious, biodiversity is inextricably linked to climate change. Plants store the equivalent of 27% of all carbon emissions each year, so protecting this capability is essential.

 A focus on environmental issues also has the potential to engage employees. People may not understand that the way their pension scheme is invested, or who it’s invested with, can have a direct impact on climate change, and their potential wealth in retirement. Aviva is looking at a system to provide pension scheme members with the ability to provide their views ahead of shareholder votes, but schemes should consider the opportunity to use more traditional communications too, to make members aware of how their investments are being used to deliver a more secure future for all of us.

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