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Pension funds have no excuse not to engage in climate-friendly investments

For the two-thirds of Irish workers with a private pension of some sort, greening one’s pension is not easily done

When it comes to investment funds more generally, Ireland is the third largest funds centre in the world
When it comes to investment funds more generally, Ireland is the third largest funds centre in the world
Sadhbh O'Neill
Tue Mar 05 2024 - 06:00

If you have a pension, you have power. So much power, that greening your pension could reduce your carbon footprint by 21 times more than if you gave up flying, became vegetarian and switched energy provider combined. This is according to a report published in February this year by UK advocacy group Make Your Money Matter.

For the two-thirds of Irish workers with a private pension of some sort, greening one’s pension is, however, not easily done. To start with, pension providers are largely chosen by one’s employer. A government commitment in the 2019 Climate Action Plan to introduce a requirement on pension providers to give savers information on whether their money was invested in fossil fuels has been dropped, making it difficult to find information about how and where pension funds are invested. Complicating things further, sustainable and Environmental and Social Governance (ESG) investment has become a minefield of jargon with no universally agreed standards.

When it comes to investment funds more generally, Ireland is the third largest funds centre in the world with almost 6 per cent of worldwide investment fund assets, totalling €3.9 trillion. According to Irish Funds Industry Association, Ireland is a leader in ESG investments in Europe, with approximately €1.2 trillion in assets or 31 per cent of total assets. But how sustainable are these investments really? Make Your Money Matter reckons that £1.2 trillion of the £3 trillion in UK pension funds should be redirected towards sustainable and clean energy solutions, suggesting that about €53 billion could be similarly diverted from the €127 billion held by Irish pension funds towards sustainable investments and the renewable energy transition.

However, it is easy to pay lip service to ESG principles, which have been criticised for being too vague and certainly not prescriptive enough in relation to fossil fuels. Recent studies carried out by the International Energy Agency, along with Carbon Tracker have found that 90 per cent of all fossil fuel reserves are essentially unburnable under a 1.5 degree warming scenarios. Listed companies hold $600 billion of the $1 trillion in upstream oil and gas assets. These assets risk becoming written down at a loss if the resources cannot be extracted due to new international commitments or government policy. At the very least, say Carbon Tracker, no more coal, oil and gas IPOs or bond placements should be supported and an urgent moratorium followed by a ban on such developments is needed. Given the warnings in recent IPCC reports, auditors and analysts should be stress-testing investments and portfolios for the effects of a 50 per cent cut in emissions by 2030. Investors should become active owners and guide their investee companies towards a strategy that is both aligned with global climate goals and reduces their exposure to energy-transition risks.

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It is entirely reasonable to ask whether Irish pension funds are facilitating the continued release of carbon dioxide into the atmosphere. Some Irish pension funds have adopted vague net zero targets but have no interim targets or detailed strategies to align investments with the Paris Agreement; some pursue policies of “active engagement” with investees instead without detailing how they propose to do this in practice by recording their votes at shareholder meetings. Others shun investments in coal for example, but not other fossil fuels. Many funds state adherence to the UN Principles for Responsible Investing. However, there is no objective assessment of Irish pension funds that would help savers choose between various providers. Nor is there a plan for a phased withdrawal from climate-destructive investments for the investment community.

Should we be calling for all funds to divest from fossil fuels? Ethical investment managers Ethico advises that engagement is a better way to shift investment away from fossil fuels and into renewables, with the threat of divestment as a last resort. This requires effort and commitment from an industry sector that is notoriously conservative, risk-averse and somewhat in denial about the fate of fossil stocks. But writing down the value of fossil fuel stocks simply makes them cheaper for private equity buyers with no qualms about ESG. Furthermore, these assets are not necessarily retired when investors flee, pointing to the need for co-ordinated government action to phase out these entities and further fossil fuel infrastructure.

Critics point to the obligation on investment managers to maximise performance, reduce risk and diversify portfolios, citing the risk that onerous ESG obligations put them in conflict with their mandate. However, it would be wrong to assume that responsible investment comes at a cost, when in fact, the opposite might well be the case. Recent reviews found that divestment from oil does not damage portfolios, and across six different categories of fund and over a five-year period, sustainable funds consistently outperformed their standard counterparts. If ESG investing does not come at a loss, then pension funds have no excuse not to do it.

Sadhbh O’Neill is the senior climate adviser to Friends of the Earth Ireland