Aron Marshall l Palladium - May 07 2021
Solving Climate Change with Sustainable Investments, One Pension Fund at a Time

While many people focus on recycling properly or cutting down on plastics to take action against climate change in their day-to-day life, they might be shocked to find out that one of the best ways to help the environment is hidden in their investment accounts. Ensuring that pension and retirement funds are invested sustainably is an effective action individuals can take to tackling the climate crisis. Beyond choosing where to shop and what to buy, consumers can also influence what products and services even reach the market, by steering how their retirement funds are invested.

For many individuals, their pension is their closest interaction with the financial market. An estimated USD 47 trillion is invested in the world's pensions. This is approximately 50 per cent of all the money invested in the global financial system. In short, pensions have huge leverage within the global economy, and the choices made on where they are invested are significant.

In 2018, less than 1 per cent of assets in the world's largest 100 pension funds were invested in low-carbon solutions. Moreover, only 15 per cent of these funds had a policy in place which omitted fossil fuels in some way from their investments, and 65 per cent did not have any kind of formal climate policy.

Just as individual investors with pensions often do not have access to reliable climate-related financial information to guide their investing decisions, professional investors working for financial institutions (FIs) often do not either. Without this information, pricing climate-related risks and opportunities correctly is extremely difficult for FIs, making them unwilling to invest in low-carbon portfolios.

The Rise of Sustainable Investing

But things are changing to better support climate investments. For example, the Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board in 2017 with the objective of helping FIs, including investment banks and pension funds, to make informed decisions around investing sustainably. TCFD developed recommendations for companies disclosing climate-related information to investors. This information enables investors to gain a greater understanding of the performance of carbon-heavy assets and the exposure of these assets to climate-related risk.

In November 2020, the UK Government’s Finance Minister, Rishi Sunak, announced that, using TCFD guidelines, climate risk reporting will become mandatory for large companies and financial institutions in the UK in 2021.

“This will be the first in a series of new issuances as we look to build out a green curve over the coming years, helping to fund projects to help tackle climate change, finance much-needed infrastructure and investment and create green jobs across this country,” noted Sunak.

TCFD is just one of over 300 sustainable investment-related initiatives improving disclosure and understanding of climate risk. These initiatives, and an increased awareness of sustainable investing by stakeholders, has meant that interest in sustainable investing has grown significantly in recent years. According to recent reports, USD 20.6 billion (GBP 15.1 billion) was put into sustainable funds in the US in 2019, which is nearly four times higher than in 2018.

Supporting Sustainable Investing

Along with these policy initiatives, a range of green finance initiatives are cropping up to strengthen sustainable investing, which incorporates environmental, social, and corporate governance (ESG) criteria into investment opportunities.

One of these is the UK Partnering for Accelerated Climate Transitions (UK PACT) program, a grant management program which works in partnership with rapidly industrialising, high-emissions countries to support reductions in emissions towards the 2015 Paris Agreement goal to limit climate change. UK PACT has awarded funding to a range of organisations delivering technical assistance projects acting on emissions reductions.

For example, in China, a country that accounts for about 28 per cent of global greenhouse gas emissions, UK PACT is supporting the partnership between the City of London Corporation and the Beijing Institute for Finance and Sustainability, which are leading the ESG Leaders Forum, an initiative designed to further build capacity around ESG into the Chinese investment community. The Forum provides Chinese institutional investors with the knowledge and tools to drive informed and strategic ESG decisions. Overall, the Forum brings together an increased understanding of climate risk, new opportunities associated with China’s climate transition, and the capital needed to make this transition happen.

Meanwhile, in Colombia, UK PACT is supporting the implementation the Colombian Climate Assets Disclosure Initiative (CCADI). The initiative builds on existing international experience, including the TCFD framework, to promote disclosure of climate-related risks, with the aim of directing financial flows away from carbon-intensive assets. The project will provide personalised recommendations for investors, tools for identification of climate change risks and engagement with companies, and capacity building and awareness-raising workshops around climate-smart investing to investors.

Using Pensions to Drive Change

Across the world, there is an expanding portfolio of initiatives aimed at strengthening sustainable investing, from standards such as TCFD promoting enhanced climate-related risk disclosure, to programs like UK PACT which provide critical funding for training to investors in rapidly industrialising countries. However, action to address climate change has to happen across all levels of society, from corporations, to government and individuals. At an individual level, sustainably investing one’s pension is arguably the most powerful tool for influencing fossil fuel industry and policy makers.

As more initiatives take shape around green finance, it will become easier for individual investors to make informed decisions on using pensions or other funds to tackle climate change. Through research into ESG ratings of companies, or investing in ESG-integrated funds, individual investors can make informed decisions and take those crucial first steps.
Doing so ensures that money is channelled away from heavily polluting industries and instead finances sustainable industries such as renewable energy. With increased finance comes expansion, research and development, and ultimately political sway, catalysing the shift towards a ‘green’ economy.

Aron Marshall is an Associate in the Climate, Environment & Natural Resources team for EMEA. His roles include coordinating the portfolios for UK PACT in China and Malaysia.

Palladium supports the BEIS-funded program UK PACT which works with implementing partners around the world. To learn more about the program’s work in China and Colombia, visit their website. For more information, contact