Pensions. Assets. Investment funds. Boring, right? Yet research shows their potential impact on our carbon footprint to be a game-changing 27-times higher than diet and lifestyle changes. Have we all been missing a huge trick?
The world of finance is often murky and confusing. Deliberately so. If you don’t know who your pension provider is, what happens to your pension money (or even really what a pension is) you’re not alone. Our pension funds (to the tune of £241 billion in 2019) don’t just sit there. They’re invested for us. The question is, where? Is this £241 billion invested in green initiatives and a sustainable future, or is it funding industry which continues to damage the planet? With their new app, Go Invest Green aims to help us find out the answer to this question. By doing so, they’re injecting some much-needed transparency into the industry and a choice as to where our our money goes. As it turns out, they’re also handing us an immensely powerful weapon in the war on climate change. Here are some simple figures (provided by the Office of National Statistics) to illustrate the problem, and the potential.
Crunching the numbers
- According to The International Energy Agency, we need to invest an extra $1–2.75 trillion in low carbon technologies each year until 2050 to mitigate against the worst effects of climate change.
- This money already exists. Global long-term investment (a.k.a ‘fixed capital expenditure’) exceeds $20tn per annum.
- In Great Britain alone, total private pension wealth was £6.1 trillion from 2016 to 2018. This is an astonishing 42% of our total wealth. In fact, pensions are the largest source of private wealth, even ahead of housing (36%).
- 37% of this pension wealth (that’s an eyewatering £2,242 billion) is held in ‘active pensions’, where money is continually being contributed into the fund. This is money that is being put to use, right now, for better or (more likely) for worse.
These figures, despite first appearances, paint an immensely hopeful picture. The huge financial resources required to minimise the effects of global warming are already available. As we all know, however, it’s not size that matters, it’s how you use it. Currently, this enormous wealth is controlled by asset managers who decide where to invest your money based on perceived risk/reward ratios. This money, predictably, is invested in the Gargantuas of the global market and FTSE 100 companies. FTSE 100 companies alone, according to a United Nations report, caused £1.2trillion in environmental damage in 2008. That is just one year. If that were a nation, it would be the eighth largest economy in the world.
Aside from the obvious damage to the planet, is this really a sensible financial investment?
Passing the Marshmallow Test
There’s a famous psychological experiment, held to indicate future success of children. Given a single marshmallow, the child is told that if they resist eating the sweet treat for 15 minutes, they can have two marshmallows. Inevitably, many children succumbed to the immediate, gooey gratification. Those who didn’t, however, were found to have more successful lives in a number of ways. The message is clear: those who can think long-term ultimately reap the rewards. It’s becoming increasingly clear that planet-damaging investments are failing the marshmallow test. Spectacularly.
Non-green investments simply don’t fit into the new world. Because of legally-binding international agreements such as the Paris Agreement, as adviser Tanya Pein told Shares Magazine:
“The valuation and dividend risks in the traditional oil and gas sector continue to increase sharply… This leaves the FTSE 100, with its predominance of oil and gas companies, a high-risk option — on a financial returns basis alone, why take that risk?”
Damaging the planet is risky. Who knew? Fortunately, from a financial perspective, greener is safer. According to a recent Trustnet study, funds that invest green are consistently outperforming their conventional counterparts. In fact, total returns were higher for funds investing according to green principles in 20 out of 26 sectors. These ‘green principles’ are those in alignment with what’s known as ‘ESG’: Environmental, Social and Governance criteria.
Remember this term. Every indication is that this will be the future. The value of energy companies continues to fall, and the UK is becoming increasingly reliant on renewables.
Go Invest Green: How we can invest in a sustainable future
We all know how capitalism works. Consumer demand creates pressure, which leads to supply. In theory, then, the solution is simple: we need to make sure that our money is being invested in sustainable technologies and industries. But how do we go about this? Not only do most of us not know who our pension providers are, but most pensions providers are woefully secretive about where they invest our money. Even solid, reliable British institutions are failing in this respect. According to a ranking system by FairPensions, the BBC scored only 21% for transparency, and the Royal Mail a shocking 14%.
At the risk of channeling Dominic Cummins, we need to take back control of our money. This is where Go Invest Green comes in. This new app allows customers to view the green credentials of the largest pension providers. From there, we are free to make an informed choice.
This story is classic, almost cliched. Large, secretive companies fund even larger, more secretive corporations. These corporations damage the planet, without us ever knowing about it. With greater transparency, this ruinous chain can be broken. The more we know about where our money is invested, the more the pressure grows to invest in sustainable, ESG-compliant industry.
Nobody wants to be the child who scoffed the marshmallow after 30 seconds. Investing green is better for our wallets. It’s better for the planet, far more than is commonly realised. It needs to become the norm, and we can make this happen.