I noticed two articles concerning pensions and net-zero over the last couple of days. First there was this from the Guardian:
Pension funds should face legal obligations to bring their investments in line with the net zero greenhouse gas emissions goal, the film-maker Richard Curtis has said.
Curtis, a co-founder of the Make My Money Matter campaigning group, urged ministers to follow up the UK's legal commitment to reach net zero emissions by 2050 by making it mandatory for pension schemes to align their portfolios with the target.
Then there was this from the FT:
The UK universities' pension scheme has set new interim targets for reductions in carbon pollution to spur progress towards achieving a goal of net zero greenhouse gas emissions across its portfolio by 2050.
The FT added:
The £82bn Universities Superannuation Scheme, the UK's largest private pension fund by assets, will measure the carbon intensity — emissions as a percentage of its assets under management — of its portfolio relative to a 2019 benchmark to assess progress towards net zero.
For the record, I am a member of the USS.
Both articles refer to climate concern within the context of pension provision. Neither, I suggest, get near to a solution because they ask the wrong question.
Knowing the greenhouse gas emissions of a company is only of peripheral concern to a pension company. Admittedly, failure to address that issue might imply there will be few pensioners for whom provision might be needed, but eliminating greenhouse gas emissions is an insufficient criteria for ensuring a fund might be able to pay pensions.
What a pension fund needs to know is that emissions can be cut within the framework of a viable business entity. The second condition is, for a pension company, as important as the first. For the pensioner to survive but not have a pension would represent a might y big failing by a pension fund.
In that case for pension funds to focus on emissions data alone is an error on their part. What they want to know is who can eliminate emissions at low cost and then build sustainable net-zero businesses thereafter. That requires that climate change, and its potential cost, be on the balance sheet now. It is not because we have nothing like sustainable cost accounting as yet. In that case pension funds are operating in the dark when it comes to climate change.
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It’s just a question for me not a disagreement: Isn’t the problem that pension actuaries have such a narrow brief anyway to maintain the value of the fund and nothing else? Is that something that could be changed by legislation or could those managing pension funds take that action for their pension fund if they wanted to? Do they have the discretion?
Because you are right – what is the point in placing a pension fund into a sector of the economy that will shorten the life of those covered by it. Unless of course – that is part of their management tactic – accruing deceased funds? I don’t know………
They can now take other issues into account, legally
They can – but will they?
In my experience most Pension Trustees are slaves to the Consultants…. who have a rather narrow view of their job. Dissent is discouraged and it is an industry that seems quite happy to drive the bus over the cliff – as long as everyone else is on board with them.
USS is interesting. First, it is big so what it does matters… and with most Trustees being academics they are able to think a bit more clearly about the deeper issues than most; I suspect that their pension consultants hate them for it!
How they approach these long term issues is up for debate but at least the debate is happening. (The problem is when long term thinking bumps into the raw reality of rising contribution rates and shrinking real incomes…. but that is another story!)
I wonder if this announcement from USS (of which I too am a member) is a nice little attempt to distract from the strike action being taken by many academics in universities that affiliate to that pension fund (i.e. not post 1995 universities: ex-polytechnics) at the changes being forced on schemes members? These are seen by many members of USS as detrimental to the pension scheme – for members at least – and the reasons for the changes have been strongly disputed by the University and Colleges Union (UCU) and many members of the USS for years but to no avail, Hence the current strike action.
Even Martin Wolf says the USS has its assumptions wrong…
I am not sure that I understand the points you are making, Richard. There is absolutely no question that pension fund trustees have a fiduciary duty towards their beneficiaries; I am not aware that anyone has suggested otherwise. However, failure to take account of ESG considerations that are relevant could be considered to be a breach of fiduciary duty (UNEPFI/Freshields report, 2005).
Whether through pricing/trading mechanisms and/or taxation, carbon will increasingly be priced into economic activity, so intensity is an important fiduciary consideration, and not just an issue about Net Zero ambitions. As well as pricing, another futureshock could well be the risk stranded assets (see Carbon Tracker), and it is for those reasons that forward looking pension funds, as enlightened owners trying to get maximum long term value for their beneficiaries, engage on transition issues with investee companies in the oil/gas sector.
Far from “operating in the dark”, pension funds have been globally investing huge sums in clean technology and energy generation, amongst the largest investors for two decades and more. Through industry organisations like IIGCC (Institutional Investors Group on Climate Change), major pension pensions understand their roles and responsibilities. Incidentally, rather than being Johnny-Come-Latelies operating in the dark, the IIGCC played a significant role in helping to convince the European Commission to raise its 2030 climate ambitions. This was an important lever in convincing the G7 to similarly raise its commitments. Without the determined lobbying and by pension funds and other asset owners, it highly unlikely that the 2015 Paris Agreement would would have been established.
I am unconvinced that large pension funds would “focus on emissions data alone”. There is a lot going on, and they are not operating in the dark.
First of all, in 2005 ESG factors had not been declared to be part of fiduciary duty in the UK
Second, did you read what I wrote?
Tell me how can you asse4ss viability without accounting data if you did, please. I want to know how you can appraise the cost of closing the current business and opening a new one that is sustainable without cost estimates for doing so that have been subject to audit.
If any pension fund adopted your proposal re sustainable cost accounting they wouldn’t make any investments.. in fact there would be hardly anything left to invest in as your framework renders 99.9% of corporates uneconomically viable!!
So, now you know that is true why are you investing?
Please explain what is rational about your decision in the light of the evidence that my accounting suggests to be appropriate?
You don’t need to.
As usual, you are promoting your usual response to a problem you don’t fully understand, which just happens to involve something you’ve invented to be the answer.
It isn’t the answer for many of the issue you think it is, and it certainly isn’t the answer to the issues here. Incorporating carbon costs is the bets, and indeed the only credible way of doing so.
There’s no money in that for you though, is there?
It is interesting that in a spate of emails this afternoon you neither seem to know your own name, or how to spell it, or know what your email is.
Tell me, why should I take you seriously in that case?
“So, now you know that is true why are you investing?..Please explain what is rational about your decision in the light of the evidence that my accounting suggests to be appropriate?”
So you do really believe that 99.9% of companies are unviable? Of course they are only unviable in your world which is fortunately not the world we live in.
Politely, is that really the best you can do?
Not very persuasive is it, to simply reiterate your initial unsubstantiated claim?
Might I suggest you give up?
Pensions are a minefield without a clear way out. I decided very late in life that I wanted my fund to be in socially responsible investments SRI’s. I’ve listed all the types of companies and investments that I don’t want to support, but I’m still in the hands of the fund managers to attempt to make a return that’s at least keeping pace with inflation after all the costs are deducted. I think I’ll be lucky to achieve this.
If I was a young person trying to build up a fund using such criteria, I’m not sure how I would view the prospects when my peer group are generally hoping for the best possible return from investments without the SRI strings attached and likely to do much better.
Just what I was thinking. My husband and I did exactly that, for the same reasons we used Ecotricity for energy and the phone coop, etc. But when we were saving up our pension pot, there weren’t many suitable funds to invest in. Then my husband died when he was 65 and had only had his pension for six months. Mine is a pittance compared with people who didn’t care. Yet now I feel despondent and being told off for not caring enough, Just can’t win.
I remember going to a talk about the environment given by my then labour MP. He kept talking about reducing carbon by 2050. I asked him who decided on 2050 as most of the people in the room would be dead by then! This was about 2005. When I was studying environmental science in the 70s he was studying politics and the economy.
Sorry to hear that Jen.
I do wonder whether some of the naysayer commenters on this post have ever considered what a monetarily maximised pension will do for them in a world where the productive capacity of the world economy has been destroyed by climate change and biodiversity loss. In such a world a pension will be worthless whatever its nominal monetary value.
You are right…..
I am also a member of USS, and thus read the recent news about their investments with special interest. It reinforced my opinion that your view on carbon accounting is the way forward.
A pension fund’s primary legal responsibility has to be to those who, now or in the future, depend on the money they invest in trust to fund their retirement. They can only engage in a different investment strategy – as USS say they are – if they are confident they are still able to meet that objective.
However an upfront accounting requirement to make provision for CO2 reduction immediately means that investments can be compared on a level playing field – those companies currently exploiting fossil fuel prices without planning for a non-fossil future would have diminished growth potential and thus be assessed fairly compared with those investing in a greener future. And pension funds decisions about investing for future pension payments could make an ethical choice without detriment.
(And while the current USS dispute is not your topic, they do seem heavy-handed – or perhaps subject to government bullying – to claim to be underfunded when there is no history of such an asset level suitably invested being unable to deliver their commitments over the timescale pension companies plan on).
Thanks
And the USS claims are based on very dubious foundations
Given the nature of trhe modern stock market with automated trading and the average share held for minuites, I am not sure that anything connected with the Stock Market could be called an investment.