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Why your pension fund may be causing climate change

What we spend money on has consequences. But while we are usually aware of what our own capital is used for, how about the money we put into pension funds, or to insurance companies?

FILE: Environmental activists rally for action on climate change in New York a day before the start of the COP21 conference in Paris. Picture: AFP.

If you got an unexpected windfall, what would you do? Would you donate to charity, buy a flashy car, or splash out on a piece of art?

What we spend money on has consequences. But while we are usually aware of what our own capital is used for, how about the money we put into pension funds, or to insurance companies?

There are few requirements for pension funds and insurance companies - known as ‘asset owners’ - to reveal what they are investing in. And there is no obligation for them to ensure their investments are in sustainable sectors either.

What this means is that your pension money could be invested in, say, a coal plant - a highly polluting energy source and a slowing industry - and you would never know it.

At WWF, we believe that asset owners have a crucial contribution to make towards the Paris Agreement’s climate targets - keeping global temperature rise to well under 2°C and aiming for 1.5°C.

After all, while climate change is primarily a terrible threat to our existence, it is also a major financial risk; $7.2 trillion could be lost in value from financial portfolios globally by 2100 if no further action is undertaken on climate change.

At WWF, we want asset owners to invest in renewable energy and the green economy rather than in sectors which cause climate change, like fossil fuels. Wind and solar energy offer a huge investment opportunity; they are rapidly growing industries with dropping prices and steady returns.

Some progress has already begun. Earlier this year, WWF published research based on data from 29 of Europe’s major asset owners, mainly pension funds. We found that nearly all of them had cut public equity funding to coal mining. However many of them were still investing in coal power and not focusing enough on the potential of renewable energy.

Those findings were only a fraction of the whole picture. We actually approached over 80 asset owners, many of whom agreed to test whether their investments are compatible with a scenario that keeps temperature rise below 2°C, as per the Paris Agreement. However, they were not obliged to disclose the results - and it’s this lack of mandatory disclosure that makes it challenging to hold asset owners accountable for their investments.

Bringing asset owners in line with the Paris Agreement starts with more transparency. The EU and Member States should require investors to assess and publish their climate alignment, as recommended by the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). Of course, asset owners can - and should - also lead the way, by assessing their climate alignment on a voluntary basis and disclosing the findings.

Aligning investments with the Paris Agreement, studies show, is the best way for asset owners to safeguard the money and interests of their members and beneficiaries - over time, this is the surest way to better returns. Asset owners should acknowledge this officially and act upon it. For example, by developing tools to help them to set climate science based targets, and by using their power as shareholders to push companies in their portfolio to adopt strategies in line with the Paris Agreement.

Doing all of this will help fight climate change and protect us from future climate-related costs, but it will also guarantee a better and safer return on investment.

In the long-term, that’s far better than a sudden windfall.

Written by Sébastien Godinot, an economist, WWF European Policy Office.

This article was republished courtesy of the World Economic Forum.

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