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What is the climate impact of your pension fund?
02 March 2021

What is the climate impact of your pension fund?

7 minute read
Corporate climate action Climate risks & opportunities
Martin Christen Senior Director Central Functions
Richard Knight Sustainability Lead

Our pensions have the power to shape a more sustainable future for all.

But have you thought about where your money goes? You may not think of yourself as an investor, but if you have a bank account and a pension, you are one. Our money is a powerful tool, whether we realise it or not.

Our financial footprints could actually matter more than our carbon footprints. Switching private pensions to sustainable ones that exclude fossil fuels could potentially be up to 27 times more impactful than cutting meat from our diets, limiting international travel, and taking up other lifestyle changes.

This is big news for climate action. The OECD estimated that in 2019, more than US$ 50 trillion was invested in pension funds around the world. Yet a significant chunk of this money contributes to the deforestation of precious rainforests, finances war that leads to famine, and supports new fossil fuel projects. In reality, less than 1% of assets in the world's largest 100 pension funds were invested in low-carbon solutions just a few years ago, according to ShareAction's research. Ironically, US$ 50 trillion is also the amount that analysts think we need to spend on five technologies by 2050 to meet the goal of the Paris Agreement and limit global warming to 1.5°-2°C. So how can we use our pension funds in a more climate-friendly way?

How do we move to #PensionsWithIntention?

Taking and enabling climate action is in South Pole's DNA. This is why we've put our money where our mouth is. We've committed to ensuring that, within the next 20 months, all of our default pension providers across our 18 global offices are sustainable. In fact, we have recently changed our UK pension provider, which - based on conservative estimates - will help avoid the equivalent of 2,407 tonnes of CO2 from being emitted this year (relative to 2020), and the equivalent of 21,661 tonnes of CO2 by 2030*.

With such climate benefits, why aren't more people making their pensions a powerful tool for climate action?

One big challenge is that, very often, people don't actually know what their pensions are invested in. Most remain in the 'default' funds their company initially enrolled them in. They may end up investing in organisations that go against their values, such as oil and gas, coal, arms, mining and gambling, for example. (To get a better idea, this report ranked the world's largest pension providers on climate change in 2018 to show how different providers performed.)


This video from Make My Money Matter illustrates the environmental destruction our pensions could be funding.

"Most of us have a bank account or a pension scheme, but how often do we really think about the daily impact on the climate of our retail deposits and investments? A good place to start is by speaking with your pension trustee or your bank's customer service team about how they are investing your money", says Rebecca Self, Director of Sustainable Finance at South Pole.

Another challenge is finding a truly sustainable pension provider. Frequently, 'ESG-aligned pension funds' simply means a few exclusions for harmful environmental activities such as coal mines. Ethical does not always mean sustainable. A pension provider may have an ethical or socially responsible fund, one that excludes fossil fuels, for example, and gives more weight to companies that have a positive impact on the planet. But some ethical pension funds could still be investing in carbon intensive companies, such as fossil fuels, even if such companies boast of plans to transition to the low-carbon economy and adhere to international standards related to human rights. This is because the world of responsible or environmental, social and governance (ESG) investing is complex. There are various ESG strategies and they do not necessarily exclude all fossil fuels or only include renewable energy, for example, which is why some ethical or responsible funds may have an investment in fossil fuel companies.

At South Pole, our proactive approach started when a new colleague at the London office challenged the team to set an even higher bar for our pension investments.

The way we approached this shift to sustainable pensions was by

  • assessing which pension providers had managed portfolios with Net Zero emissions targets by 2050 or earlier;
  • what sustainable or ethical funds they could offer;
  • what made these funds sustainable and ethical;
  • what companies or sectors they did not invest in and what exclusions they had; and
  • asking which were the top 10 largest companies included in the fund.

In the UK, we chose a pension provider that has set a Net Zero carbon emissions target for 2050 and that engages its investee companies to up the ante on climate action.

Looking ahead: Net Zero pensions

"Financial services play a huge role in the global economy today – especially when it comes to investing in our collective future, in building a thriving and resilient world we actually want to retire in. It's more than just a moral question, it's an economic one too," Rebecca Self emphasises. “We must ensure that our pensions support the wellbeing of people and planet in the long-term. Initiating this big change can start with a simple question. What is my pension financing?"

As individuals and organisations, we must urgently bring our pension providers on our shared journey towards Net Zero emissions. This can be done through concrete actions, such as choosing a more sustainable pension provider, and by inspiring others to follow suit.

This is why South Pole UK not only moved to a more sustainable pension provider, but also partnered with campaign group Make My Money Matter to amplify our voice in challenging UK pension providers to set Net Zero targets well before 2050, halve their emissions by 2030, increase their positive climate impact, and most importantly, to use their shareholder rights to improve company performance. Our colleagues also used Make My Money Matter's 'Net Zero hero' tool to ask our former pension provider to join our march to a more sustainable future.

Around the world, we have seen a tsunami of governments, organisations and financial institutions setting Net Zero targets. They should use sustainable pensions to be part of their plan to get there.

And we do see very exciting changes happening. Sustainable investing is rising: a record US$ 20 billion was invested in sustainable funds in the US in 2019, nearly four times as much as the previous 2018 record, according to data provider Morningstar. And this is probably not just because they are feeling more ethical or because they are worried about climate change. Sustainable investments make financial sense too. Recent findings show that investors favouring ESG do not have to compromise on returns. Quite the opposite, in fact: close to six out of 10 sustainable funds delivered higher returns than equivalent conventional funds over the past decade.

Why is this? In addition to reducing risk by moving away from companies who are likely to do poorly in a warmer world, for example, many have spotted an investment opportunity in actively looking for businesses that will benefit from the transition to a Net Zero economy. Many are also trying to get ahead of regulation: in the UK, once the draft Pensions Schemes Act 2021 is signed into law, it will mean that pension providers will have to detail the climate risks and opportunities associated with their investments. The EU Green Deal will also have an enormous impact on companies - in Europe and beyond - which will affect investment flows.

At South Pole, we're looking after our collective future in more ways than one. But our conservative estimate of annual emissions savings from switching to a more sustainable pension provider in just one of our global branches is already equal to the carbon sequestered by 40,000 tree seedlings grown for 10 years. By the end of 2022, the aim is to multiply this impact across every South Pole office.

Will you join us in taking climate action and making sustainable pension investments the norm?

Thinking about switching your pension provider? You might find the Make My Money Matter free toolkit or this UK guide from Good With Money helpful.

The financial sector is increasingly making Net Zero commitments – either voluntarily or to get ahead of regulation. To achieve Net Zero, financial institutions should tackle the problem from two ends: (1) reduce their operational carbon footprint and (2) decarbonise lending and investment portfolios, in line with the latest environmental scientific advice. South Pole can help with both.

* The estimated carbon dioxide (or equivalent) savings from switching to a sustainable pension fund in the UK are based on the assumed amount the average UK pension invested in fossil fuels and what impact would be achieved if that money was instead reinvested in renewables. Our analysis followed PCAF recommendations to include Scope 3 emissions for oil and gas firms, and we also included them for renewables. Calculations and methodology are available upon request. Please note that the true carbon footprint of pension pots would differ based on their actual investments. The figures here are for illustrative purposes only.

From ambition to action, your 5 step climate journey starts here
From ambition to action, your 5 step climate journey starts here

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