Addressing climate change – the financial sense for pension investors
James Wilde | May 10, 2022
Climate change presents huge financial risks that pension investments, and increasingly regulation, are taking into account. But it’s also driving extraordinary innovation, financial opportunity and commitment to a more sustainable future. Dr James Wilde, Chief Sustainability Officer at Phoenix Group, shares his insight on the developments he’s most excited about.
Pension investments must take account of the potential financial impact of climate risks – investment managers and regulators have been calling this out for some time. But what about members, do they really see the connection between climate change and the money invested in their pension pots?
Standard Life’s ongoing responsible investment research1 suggests that many customers are doing so. Interestingly, this is both moral and financial. For instance, most expect their providers to exclude harmful investments, influence positive change and meet net zero targets. But alongside this 81% of customers recognise the financial sense in considering such factors.
Helping members to consider the financial impact of cutting the carbon footprint of their pensions can provide an opportunity to improve engagement. We spoke to Dr James Wilde, Chief Sustainability Officer at Phoenix Group, who brings to life the financial risks and opportunities of climate change and the potential to drive real change.
Standard Life is part of Phoenix Group, the UK’s largest long-term savings and retirement business. This gives us access to experts across the group, like Dr James Wilde, Phoenix Group’s Chief Sustainability Officer.
How does climate change present opportunities for pension investors?
The transition to net zero is a huge investment opportunity. As Mark Carney, UN Special Envoy on Climate Action and Finance, stated: “The goal of Net Zero is the greatest commercial opportunity of our time.”2
And globally, the momentum of net zero investment is growing all the time. The agreement at the COP26 summit, held in Glasgow last year, means that almost 90% of global emissions are now covered by net zero targets3.
That creates huge opportunities for pension investors – both to invest in new and growing sectors like zero-carbon hydrogen production, and through the transition of existing sectors from energy production to car manufacturing.
Climate science requires us not just to reach net zero by the middle of the century, but to invest now to cut emissions in the next decade.
Here in the UK, it’s estimated that around £2.7 trillion of new investment will be needed between 2020 and 2035 to meet our climate targets4. That will mean that between now and 2030 our electric vehicle fleet needs to grow from around 500,000 now to around 10 million5; our offshore wind capacity to increase from 10 gigawatts to 50 gigawatts6; and heat pump installations to rise from under 50,000 per year to around 1 million5.
We’ve seen big growth in companies actively developing and marketing new low carbon, sustainable products; responding to consumer demand and emerging regulation and policy.
So there’s huge opportunity to invest in climate solutions that we need rapidly over the next 10 years.
What are the financial risks of climate change?
Climate investment offers real growth opportunities. But it’s also essential to manage the risks to our pensions of such a fundamental shift in our economy and the increasing physical risks associated with climate change.
We’re already seeing the real world impact of ‘physical risks’ such as flooding and forest fires. These can disrupt how companies operate, their supply chains, and where they choose to locate.
As governments across the globe shift to a low-carbon economy, companies that fail to change how they operate will be left behind or become ‘stranded’. This is what’s known as ‘transition risk’. It can happen through lack of demand for products or services or support from investors, or through failing to adapt quickly enough to the changing regulatory landscape. For instance, the most carbon-intensive fossil fuels are at risk of becoming stranded assets due to climate-change action, as well as the rapidly falling costs of renewable energy technologies, such as solar and wind power.
There’s also financial risk from reputational damage. A company in any industry damaging the environment in some way or not demonstrating a clear and robust climate strategy can ultimately destroy its brand, customer base and share price.
When we invest our customers’ pension pots, we’re aiming to grow their money and to protect that growth.
Can you give an example of how technology is evolving?
The most exciting development in the last few years is that low carbon can also mean low cost.
Take electricity generation: according to the International Energy Agency, solar now provides the cheapest electricity in history7.
And in offshore wind, the cost has fallen from around £150 to under £40 per megawatt hour in less than a decade. That means that offshore wind is cheaper than electricity produced from gas or coal8.
When I was working on offshore wind in 2003, the largest turbines were 2 megawatts – about the height of Big Ben. Now, they are 15 megawatts – almost as tall as the Shard.
There’s a similar story in other areas. Ten years ago, electric vehicles had a range of around 100 miles and cost far more than petrol or diesel alternatives. Now, their range is up to 400 miles9. And they’re already cheaper than fossil fuel alternatives on a lifetime-cost basis, and will soon be cheaper to buy.
Looking further ahead, there are a host of exciting innovations which offer the potential for rapid growth in new sectors. Examples include small modular nuclear reactors, and technologies which can remove CO2 from the air and store it underground.
Which other developments or opportunities are you most excited about?
At a global level, I’m really encouraged by the recognition that we need to act quickly, and with real ambition, to tackle the climate crisis. In 2019, less than 20% of global emissions were covered by a net zero target – and as I mentioned previously, that figure is now almost 90%.
That’s being backed up by real action, and increasingly that’s happening not just in Europe but across the world. In the last year, China installed more offshore wind capacity than the rest of the world had managed in the previous five years combined10.
In terms of technologies, I’m excited that the fall in costs in renewable energy generation, electric vehicles and low-carbon heating mean that the transition to net zero is not a choice between economic growth and protecting the planet – the two can go together.
Should we stop investing in those companies considered to be architects of the problem?
It may seem an obvious step to stop investment in companies which are responsible for a lot of emissions – for example, those responsible for extracting oil and gas.
That’s the easy option. But if we simply divest from those companies it’s likely that others will purchase those assets and they will continue to produce greenhouse gas emissions.
By staying invested in those companies we can use our influence as a large investor to help drive real change and support their transition to zero-carbon business models.
But staying invested has to be on the proviso that those companies are acting. That’s why Phoenix Group is working with the companies we’re invested in to ensure they set ambitious carbon reduction targets, and deliver against them.
We have however defined an exclusions policy, which lays out the most harmful activities that are clearly not aligned with the transition to a low carbon economy that we won’t invest in any more.
How are Phoenix Group and Standard Life committing to reducing carbon emissions?
Phoenix Group is committed to reducing carbon emissions across our £250 billion of assets where we have direct control by half by 2030 – savings which would be equivalent to the annual emissions of heating over 6 million homes or a quarter of all homes in the UK11. Part of this £250 billion of assets sits in Standard Life pensions.
In the long-term, our goal is to achieve net zero emissions across our business by 2050.
Meeting those targets requires real change. Standard Life is increasing investment in companies with climate strategies and those coming up with solutions to help tackle climate change. These are the businesses and technologies needed to support decarbonisation in the real economy.
But the crucial point is that this isn’t a choice between investment portfolio growth and saving the planet – our aim is to continue to deliver the right financial outcomes for our customers and shareholders, while also helping to secure a sustainable future for the planet.
Find out more
As part of Phoenix Group, Standard Life is taking action to invest in the future we all want. We’ve set clear targets to help fight climate change, and to drive a wider more positive impact on our sector and economy.
You can read more about our commitment to sustainability and responsible investment here.
You can read the climate report from Phoenix Group here.
Want to read more about investing sustainably? Take a look at our series of responsible investment articles:
1Standard Life Responsible Investing Research Report, Q1 2022. Random sample of customers with 1600 responding. When asked about the importance of responsible investing approaches: 70% considered it important to exclude companies or industries that have a negative impact on society, poor corporate governance or are damaging the environment, even if they intend to change this in the future; 70% considered it important to be investing in a way to positively influence change in industries that need to improve their impact on society, corporate governance or climate impact; 64% considered it important to invest in a way that commits to net zero carbon emission status by 2050 (or earlier). 81% agreed with the statement ‘I believe it makes financial sense to invest responsibly’. 66% thought that responsibly invested funds would perform better over the long term than funds not in the responsible investing sector. Please note, these are personal views only and not actual returns or a forecast of future returns.
2 United Nations Climate Action interview ‘Mark Carney: Investing in net-zero climate solutions creates value and rewards’
4 ABI Climate Change Roadmap, July 2021
5 UK Government, Net Zero Strategy Build Back Greener, October 2021, back calculated based on tables pages 325-326
6UK Government, British Energy Security Strategy, April 2022
7Climate Brief Clear on Carbon, Solar is now the cheapest electricity in history confirms IEA, October 2020
8Climate Brief Clear on Carbon, Analysis: Record low-price for UK offshore cheaper than existing gas plants by 2023, September 2019
9INSIDEEVs ‘The Median Range Of Fully Electric Vehicles Exceeded 250 Miles In 2020’, January 2021
10Carbon Brief Clear on Carbon, China Briefing 27 January 2022: Surge in offshore wind; Xi’s new speech; IEA’s report
11Phoenix Group: This is an estimate derived by taking a prudent view of the investment portfolio’s emissions by considering comparable market portfolios and using ONS data for emissions for heating the average UK home. The average UK home emits about 2,800 kg CO2 equivalent on heating a year.
The information here is based on the understanding of Phoenix Group in May 2022 and shouldn’t be regarded as financial advice. The value of investments can go down as well as up and may be worth less than what was paid in.
Standard Life accepts no responsibility for the information contained in the websites referred to in this article. This is provided for general information only.