Rewiring investments for an electro-economy
Last week saw Aviva announce our intention to decarbonise our automatic enrolment default funds and achieve net zero by 2050.
It’s a bold move and a stretching target given where the world economy currently sits. But as we know, in pensions we need to look at a time horizon that stretches way beyond those we deal with in everyday life. The commitments we make today will have consequences on peoples’ lives long into the future. A school leaver today may not retire until 2072 or later, our children may need an income past 2100.
So why think about decarbonising investments now?
I think most people would agree that the benefits of combatting global warming are obvious, but the size of the task is immense. The global lockdown saw this year’s energy-based emissions fall by between 4% and 7%. To achieve net zero there needs to be a 90% reduction from current levels. Achieving this level of change will require everyone to contribute, which is why we’ve asked all schemes to commit to net zero, but it will also need a seismic change to rewire a world economy based on carbon to one based on clean electricity.
Things are moving. European Commission President Ursula von der Leyen has confirmed that the EU would back a proposed 55% reduction in emissions, compared to 1990 levels, by 2030, on the way to net zero by 2050. 30% of EU’s Covid 19 recovery budget is earmarked for climate measures. Joe Biden has promised to spend $2trn over four years on low carbon infrastucture and energy, should he win the US election.
The effect on pension scheme investments isn’t just about investing in those area that might benefit from this investment though, it’s as much about those firms whose future looks uncertain, and who appear either intransigent or unable to embrace change. The risk of a scheme’s investments becoming stranded in companies that can’t function in a new world economy is one that all trustees should be alive to.
The potential challenges for businesses created by climate change are significant. The physical risk of extreme weather events might result in supply chains being shortened, and the dependency on small geographical areas, such as areas within China for much of the world’s tech production, to be reconsidered. Even working from home might need a re-think if domestic electricity supply becomes less dependable as a result of more frequent storms.
The economics of carbon-based businesses may be impacted by changes in demand for their product, commodities like coal, oil and gas, replaced by cobalt, nickel and lithium. And increasingly aware consumers actively choosing greener alternatives. Just the modest downturn in demand for oil this year has seen ExxonMobil fall out of the Dow Jones Industrial Average for the first time since 1928, and suspend pension contributions to its US staff scheme.
Increasing carbon prices might impact the biggest polluters, the EU’s 55% by 2030 commitment could see carbon prices double. Still less than the £55 per tonne advocated by the Zero Carbon Commission, but perhaps a sign of things to come.
Other challenges might come from the courts, analogies with the tobacco industry’s failure to warn people of the dangers of smoking, long after they had evidence of harm, have been drawn. At least 20 authorities in the US have filed lawsuits against US oil companies for damage caused by warming. Another avenue for court action was demonstrated when the Dutch Supreme Court ordered the government to reduce emission by 25% of 1990 levels by the end of 2020. In November, a court case, brought by a 24-year-old saver, will begin, which could determine whether Australian pension schemes need to do more to protect savings from climate risk.
This final, point is perhaps prescient. Our recent research shows that 66% of 25 to 34 year olds 1 think it’s important that their pension funds help tackle issues like climate change. It’s those scheme members with most to lose that foresee the greatest need for change, to align investments with their beliefs and with the future electro-economy.
Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.