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What will climate change do to your pension?

July 1, 2013

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.

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4 Comments leave one →
  1. markhb permalink
    July 2, 2013 12:04 am

    Good article. This type of pressure needs to be applied.
    We need to divest from fossil fuels urgently, but how…..
    “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”
    Mostly they will be long gone, and as deep in the shit as the rest of us.
    Their problem is of course that its the extractive industries which provide income, whereas growth sectors provide prospective capital gains, and risky ones at that.
    Pensioners need income every day. So they are deeply conflicted.
    When BP stopped paying dividends after the gulf oil spill that income stream forgone amounted to 12% of UK pension funds income.
    Insurance companies are where the action is at the moment, their Premiums are going up fast as they discover that all the old safety ratios are changing for the worse. Those one in a hundred year extreme climate events seem to be twice a year now round here. In USA there have been 368 climate related national disaster declarations since 2011.
    We need to get serious about this.

  2. Graham Wayne permalink*
    July 3, 2013 1:02 pm

    Hi Mark:

    You observe that fund managers mostly “will be long gone” before potential culpability catches up with them.

    I’m not so sure. The timescales we’ve all discussed for so long may prove quite inadequate – the melting ice is a case in point – and I remind myself frequently that all this is happening on the back of a financial crash in 2007 from which nobody seems to have recovered. The collision between a corrupt financial system, a political class in thrall to it, climate change, rapid hikes in energy prices and demands placed on the environment by such a huge global population, all combine to sabotage the tolerances we have enjoyed in the past. At no time has the world been so ‘joined up’ in every respect; this process may reap rewards, but it is also a global fragility that may see fund managers up against the proverbial wall in less the normal span of a career.

    You are right however in that fossil fuels are a very important part of the pension fund portfolio, but that can’t last. If the funds don’t divest and diversify, there’s going to be big trouble ahead for the old folk. (Bugger – that’s me. Better go and get a proper job, eh?)

  3. David R permalink
    August 1, 2013 1:14 pm

    Hmm … I think its tricky.
    Suppose that over the next 12 months all pension funds halve their investment in high carbon businesses (like oil and gas companies) and put it into low carbon ones (service sector industries, retailers, and, er, gulp, banks).
    Some other investors buy the shares from the pension funds. Probably at a discounted price as there are so may put (sell) contracts out there…
    and some other investors sell their shares in banks, retailers, and service sector companies. Probably at an elevated price, as there are so many call (buy) contracts out there.
    end result is a massive transfer of wealth from the now-ecologically-minded pension funds (ie : us) to other, purely pragmatic-minded (not rapacious or greedy or evil) investors.
    I dont see how this helps.
    The only right line for the pension funds to take is to GRADUALLY unwind from their investments in high carbon industries, just ahead of any market consensus about the downgrades for the long term outlook for these industries. and if the consensus about the downgrade never happens – for example if the climate change deniers turn out to be partly or wholly correct – then the PF’s should leave there money where it is.
    A PF director who steered the investments out of high carbon right now, quickly, would probably be in breach of their duties.

  4. Graham Wayne permalink*
    August 1, 2013 1:39 pm

    Hi David – I think the slow divestment is key. A really sudden market shift would be destabilising, and probably have a knock-on effect on all holdings, not just fossil fuels. There will be a cross-over point I expect, where declining fossil fuel shares meet rising values of renewables, at which point the divestment will make more sense in a shorter timescale.

    The other factor will be legislative. We can discuss shares from a perspective of trading value only (as if the market were stable), but if the governments of developed and developing countries start to take climate change seriously, any legislative moves to reduce emissions will impact on share value of carbon that can’t be burned. That too may hasten divestment – as you say, it’s a matter of market consensus.

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