Why is no lifestyle green enough without a green pension?
Summary:
- Many people try to be eco-friendly through personal actions but they are generally less aware of the (sometimes significantly larger) influence they can have through their finances.
- Investing in global corporations through pension and savings funds has an impact on global sustainability.
- Much can be done before actually switching funds, such as acquiring knowledge, benchmarking current investments to what’s available in the market, and signalling interest to fund providers.
The idea that we must strive to live ever more sustainably if we want future generations to experience the same quality of life that we do has been gaining traction. This includes reducing our carbon emissions, which contribute towards mitigating runaway climate change. What we are much less widely aware of is the scale of the positive impact we can have with our finances.
In this article, we explain what steps can be taken by those with a pension fund pot and/or a little personal savings to have their investments complement their personal environmental actions, rather than undermine them.
There is a range of personal carbon footprint calculators available to the public (e.g. WWF UK / WWF Switzerland / the Nature Conservancy (US) / the French Government). They typically analyze travelling, eating, living and other consumption habits in developed countries. Then, using estimation methodologies, they calculate a personal number expressed in terms of tons of carbon dioxide equivalent (tCO2e). This is compared to averages (e.g. 9.5 tons CO2e/person in the UK in 2022), and often to what it should be to avoid global temperature rise of more than 1.5 degrees by 2050 and limit the most severe impacts of climate change. This value is around 2 tons CO2e [1]. The typical conclusion is that we must reduce our personal direct and indirect emissions by flying less, eating vegetarian, and consuming less, etc.
On the other hand, investing in corporations indirectly via funds allows retail investors to seek healthy financial returns for their retirement, but also contribute towards the impact these companies have on their staff, society, and the planet. Over the last two decades, retail investors have gradually been embracing this position of influence on the real economy to show that they care not only about their income, but the state of the planet and social cohesion [2]. The most effective way to drive positive investor impact has been defined in terms of either providing additional financing to sustainable companies or encouraging improvement in less-green businesses [3]. This demand for sustainable fund solutions is met by fund providers with ever greater supply.
According to one study, moving the UK national average pension wealth to sustainable funds is 21 times more effective than the combined annual carbon savings generated by switching to a renewable electricity provider, substituting all air travel with rail travel and adopting a vegetarian diet [4]. This is calculated by comparing the carbon reduction from typical behavioural changes, such as switching to a vegan diet, to the carbon reduction of switching pension from a default portfolio to a sustainable one (see more in the study [4]).
Another example can be found in a recent study published by Climate Alliance, a league of civil society organisations. It showed that the number of Swiss pension funds reducing emissions and integrating sustainability stands at 32% in February 2023 [5]. Despite this, assets of pension funds which rated negatively for lack of transparency in sustainable investment strategies and/or for lack of green investments amounted to 55%.
In conclusion, retail investors often don’t realise they have important indirect influence on the real economy. They may also wish to ensure that personal actions are not counteracted by inconsistent investment, e. g. coal mining. A lot can be done even before changing funds in terms of gaining knowledge, benchmarking one’s own pension fund, and asking fund providers to signal interest. Initiatives such as the British and Swiss ones mentioned above exist in many developed markets and represent a good starting point for understanding the perceived sustainability of pension funds. Future articles may explore how to detect greenwashing in sustainable fund offerings, and differentiate between a growing number of funds making sustainability promises.
References:
- Gore, T. Carbon inequality in 2030 – Per capita consumption emissions and the 1.5⁰C goal. Institute for European Environmental Policy & Oxfam (2021).
- Edmans, A. and Kacperczyk, M. Sustainable Finance. Review of Finance, 26(6), 1309-1313 (2022).
- Kölbel, J., Heeb, F. The Investor’s Guide to Impact. The Center for Sustainable Finance and Private Wealth at the Department of Banking and Finance of the University of Zurich (2021). Based on the peer-reviewed paper: Kölbel, J., Heeb, F., Paetzold, F., Busch, T. Can Sustainable Investing Save the World? Reviewing the Mechanisms of Investor Impact. Organization & Environment, 33(4), (2020).
- Route2 for Make my Money Matter, WWF-UK and Aviva. Pension fund carbon savings research: a summary of the approach. (2021)
- Klima Allianz Schweiz. Climate compatibility of the investment policy of the Swiss Pension schemes. (2023)