What will climate change do to your pension?
In a welcome development, the Guardian’s finance hub of the sustainable business forum today featured an article about pension funds (Capital markets and climate change: can pension funds save the world?).
It’s about time this issue gained prominence, for a number of reasons, not the least being that they could indeed make a greater contribution to ‘saving the world’ than virtually any other institution outside of government. Here’s the context of the article:
“…the United Nations Environmental Programme warned that climate change, water shortages and biodiversity loss will have an increasing impact on global business in years to come. Perhaps most importantly, President Obama altered the course of climate policy in the US with a speech that promised to curb emissions from power plants at home and stop funding coal-fired power plants abroad.
It might not seem immediately obvious what this has to do with the financial system, and pensions in particular, but the above factors are examples respectively of a price on carbon, possible policy changes, and the physical impacts of climate change – issues that will affect the financial performance of businesses and therefore the investors that put their money into those businesses.
Overwhelmingly, those investors are pension funds, allocating money so people can have decent pensions when they retire. But are these pension funds up to the job or are they actively undermining the security of future retirees?
First of all, it seems inconceivable that an industry whose entire rationale is long-term, should be so obsessed with short-term results, yet as a result of structural deficiencies;
“…pension fund trustees do not see it as their job to come up with solutions to these problems, says James Cameron, chairman of clean-tech investor Climate Change Capital. Partly this is because of inertia – “the most powerful force in the pensions world” – and partly because “almost all they can think about is the massive liabilities gap they are confronted with,” he says.
By their nature, pensions are something the contributors pay into over long periods, and one might expect the fund managers to acknowledge that their planning should mirror the investment period. I understand that today’s pay-outs are a pressing matter, as of course is the growing liabilities gap. But to fail to consider the impacts in the long-term seems little short of criminal – more on this in a moment.
The focus of the article is the potential for huge losses to be incurred through investing in fossil fuels that may well become little more than junk in the medium term. For some time I’ve been concerned about another, broader issue: the effect of climate change on economic activity of all kinds. I’m not going to run through the list of usual suspects, but considering agriculture alone, the writing on the wall is bleak and foreboding.
Surely the only responsible course for pension fund managers is to adopt a prudent path, and eschew those investments which contribute to climate change – fossil fuels being again the most likely candidate – not only because such investments may become worthless, but because they have the power to evoke change without recourse to legislation.
By incentivising industry to change its behaviour and seek better energy sources, be more sustainable in water and material usage, to factor externalities correctly, and to place longevity of product cycles in a sustainable perspective, pension funds leverage their undoubted clout to protect themselves and those whose future depends on them. Given a long-term view, pension fund managers must, as a duty of care, protect their funds from a threat worse than ending up with a portfolio of worthless junk – the economic collapse of the global economy. What value will a pension redeem if climate change wreaks the kind of havoc that seems ever more likely given the inertia of political institutions to address the threat?
And to return to my point about criminal liability in the context of duty of care, I wonder if fund managers have considered what may happen if their funds collapse, they fail to meet their obligations, and it can be demonstrated that they were culpable. In the UK, perhaps the government will attempt to shield them, but in a litigious US, I suspect those deemed responsible may well end up in court, or even in prison. If that prediction has a ring of truth about it, then self-interest should encourage fund managers to position climate change correctly as the most significant threat to them and the money they hold on our behalf, both in the short and long term.