An introduction to the power of finance to fund a sustainable economic system, and an invitation to join the Go Invest Green initiative offering guidance on switching to a green pension
There are two broad paths to forcing the transition to an ecologically sustainable global economy.
One is to rewire the system. It’s happening — gradually. We’ve known since the 1960s that carbon buildup is heating the atmosphere. As the science has become clearer and the political will has been slowly summoned, governments and international institutions are engineering incentives and toughening laws to shift the world towards more sustainable forms of economic production.
It isn’t yet clear how profound the restructuring will have to be. Can a competitive global marketplace premised on constant exponential growth ever allow long-term sustainability? Perhaps in the future some other economic model might emerge — maybe a circular economy with AI and machine learning technologies playing a greater role in the allocation of resources.
The other path to change is to work with what we’ve got: whatever mechanisms the current system affords for moving towards sustainability. In a world driven by the exchange of money, that means redirecting where money goes, away from extractive and towards green economics. Just as we can use our vote to elect politicians we hope will change the way our economies are structured, we can use our money to vote for the way we want our goods and services to be supplied. The trend towards green consumerism over the past few decades illustrates the power we can exercise through our spending choices. We can also force change through what we don’t spend: our savings.
Where our money goes
Whether we know how our money is used or not — and most of us don’t — our savings shape the structure of the world economy. Money that we might think is sitting quietly in the bank, or accumulating patiently in a pension fund, is in fact hyperactive, invested and re-invested according to criteria set by the finance professionals who manage it. Unless we take the time to understand how our savings are being used it is very likely being employed in ways that might disturb us.
Most of the money we put away in savings accounts or pensions is invested in the world’s financial markets. The colossal importance of those markets for shaping the world economy has been vividly illustrated by their extraordinary performance during the pandemic. We are suffering the worst global economic downturn since the Great Depression, against the backdrop of geopolitical tensions between the US and China, the world’s largest economies. And yet stocks and shares are soaring. The Dow Jones 500, the index listing the largest publicly traded companies in the US, has risen by a fifth since April, delivering its highest quarterly increase for more than 20 years.
That’s partly due to a sense of invincibility amongst investors confident that, as with the 2008 financial crisis, governments will always come to the rescue of the markets in times of strife. It’s also because, quite simply in a world in which interest rates are low in most of the major economies, investors seeking a return have nowhere else to put their money other than to pile it into stocks.
The investment decisions they make give them enormous influence over what the world produces. Boardrooms are at least as preoccupied with attracting and keeping shareholders as with the economic fundamentals of their businesses. And unfortunately some of the world’s carbon producers have traditionally offered the most attractive investment vehicles.
Fossil fuel equities have long been at the heart of most portfolios, including mainstream pension funds, because of the world’s dependence on oil and gas and the attractive dividend payments such shares offer. The dependence of the savings of so many ordinary voters on hydrocarbons stocks is one of the less discussed reasons why governments have not been tougher on regulating emissions. But when investors themselves move against those carbon stocks, things can change — rapidly.
The new green focus on finance
Green campaign groups are increasingly focused on finance, targeting the investment patterns of big institutional investors like banks, asset managers and insurers. Climate-related resolutions have been passed at shareholder meetings of big names including JP Morgan, Goldman Sachs, BlackRock, Bank of America and Barclays. In response to pressure from campaigners, governments and — crucially — ordinary investors, fund managers are demanding more of the businesses in which they invest.
The Climate Action 100+ initiative, for example, a group of 370 fund managers and asset owners representing $35tn is urging some of the most profligate emitters of greenhouse gases to reduce their environmental impact. And earlier this summer the Institutional Investors Group on Climate Change, representing more than 230 asset managers, welcomed a recent International Energy Agency report advocating Green New Deal-style stimulus packages for a green transition.
A new market of for investment products ranked according to conformance with Environmental, Social and Governance (ESG) criterias has emerged to cater for investors concerned to ensure their money serves more sustainable businesses. They can choose from hundreds of ‘sustainable’ or ‘socially responsible’ funds offering exposure to every trend within the renewables sector — wind, solar, batteries, electric cars. Or they can simply select ‘ethical’ funds that do not include fossil fuels and other ’sin stocks’. The value of energy companies has fallen as more investors take their money elsewhere: energy companies now comprise less than 5% of the Dow Jones 500 index of big US companies, down from 11% a decade ago.
Investor pressure is putting pressure on all companies — not just the oil and gas producers themselves — to reduce their carbon footprint. All manner of businesses have begun making so-called net zero commitments, pledging to cut or offset emissions by taking an equivalent amount out of the atmosphere through carbon capture and other technologies. The ‘FAANGs’ — Facebook, Amazon, Apple, Netflix and Google — and other tech giants have all made eye-catching pledges to achieve net zero within the next few years, with other corporations like Barclays, Nestlé, and the mining and airline groups Vale and IAG following suit, at varying degrees of speed.
Supercharging oil’s decline
The Covid-19 pandemic has supercharged the trend towards green investment. The oil and gas industry has been hit particularly hard by the economic downturn, with plunging demand for oil sending prices to the floor. If the structural changes to the economy forced by the lockdown — the increase in teleworking, reduced commuting, more localised supply chains — become entrenched, the damage to the fossil fuel sector may be permanent, as some of the oil and gas majors themselves have acknowledged. BP, for example, has warned investors it has had to write down the value of its assets by $17.5bn (some 20% of company’s value) conceding that permanently lower oil prices mean that much of the hydrocarbon reserve it had earmarked for exploration will have to be kept in the ground.
BP’s announcement earlier this year that it intends to become a net zero carbon company by 2050 was met with scepticism and not a little amusement. But that commitment is now looking much more serious. Indeed the oil majors are well positioned to become leading green energy providers: their accumulated engineering expertise makes them well equipped to develop major wind and solar projects, and they own sprawling networks of gas pipelines that could be repurposed for hydrogen and other low-carbon fuels.
Orsted, the offshore wind giant, is an example of one such corporation that has made the transition to renewables. Once Denmark’s national oil company, Orsted became the first fossil fuel producer to move away from its traditional business to green energy. It is now worth $46bn, making it nearly half as big as BP, showing the value of being invested in companies ahead of the curve.
What we can do
Ordinary investors like us can speed the accelerating energy transition by ensuring our savings are invested in new technologies and industries, rather than propping up old ones. We can do as much or as little as we are able. The simplest thing we could do is move our cash savings or — if we have one — mortgage to an ethical bank. If we want to commit to taking full control of our savings there are many investment platforms that allow us to invest in exactly those companies, sectors and countries we want to support. But the most powerful and practical step for many of us would be to check what our pension is going towards, and, if we don’t like it, to switch to a greener fund or explore whether a change in the pension’s investment policy is possible.
One lingering concern about doing so is the still widespread perception that green pensions are luxuries for those who are already financially secure. But as green investment options have matured there is ample evidence that environmentally-sensitive pension funds are financially as well as ethically sound. A major study published earlier this year, for example, found that sustainable funds have over the past decade actually outperformed and outlasted equivalent conventional funds.
Another issue is the difficulty of navigating the huge amount of often conflicting information available about green investment. The world of finance is notoriously opaque. And as companies and fund managers rush to assert their green credentials, it can be very difficult to know who to trust. As ethical investment has become more popular the problem of ‘greenwashing’ has become ever more perplexing.
Put simply, methodologies for assessing a company or fund’s ESG credentials are still evolving. In the absence of agreed standards it’s possible to present all kinds of misleading environmental metrics. Most of the available data about companies’ carbon footprints, for example, is self-reported, and not independently audited. Well publicised scandals such as the Volkswagen diesel emissions fraud demonstrate how firms can flaunt their supposed green credentials even as they seek to game the system.
Things are getting better. The industry is developing environmental reporting and assessment processes comparable to the sophisticated (though still imperfect) metrics it has refined for reporting financial performance. One major initiative, the Task Force on Climate-Related Financial Disclosures led by Mark Carney, the former governor of the Bank of England, has signed up more than a thousand organisations. All financial institutions are under increasing pressure to disclose the carbon emissions of their loans and investments.
Go Invest Green — a Climate Venture Collective initiative
If you are interested in investigating the use of your savings, the Climate Venture Collective’s Go Invest Green initiative can help. The project is developing a tool to give you an idea of how green your pension is by making it easy for you to compare it with the UK’s most common pension plans. You may be pleasantly surprised — your pension may well be perfectly good enough. Or the comparison check might encourage you to check out other pension options.
Visit Go Invest Green to sign-up for email notifications when the tool goes live, and to indicate whether you would like to trial the tool. You can also follow us @goinvestgreen. We’ve picked out some of the most useful online resources currently available below.
Earth Day Switch — Consider switching your bank account here
Make My Money Matter — a new campaign fighting for a world where we all know where our pension money goes
ShareAction — Extensive information on responsible pensions and actions you can take if yours needs to be better
The Good Guide to Pensions — excellent ‘how to’ information from the Good With Money website