The financial services industry offers products and services that provide peace of mind to millions who want to enjoy a more secure future.
But many pension funds are financing the most destabilising force of all – an oil machine that is driving the climate crisis and threatening the very basis of the global economy itself. Will pension funds embrace net-zero before it’s too late?
The climate crisis poses existential questions for every sector of the economy – but the trillions of dollars invested in pensions schemes are unusually vulnerable to both the direct impacts of climate change and the ways in which the transition to a net-zero economy might be managed.
The pension fund’s age-old business model of dutifully investing their members’ money in a manner that maximises return and minimises risk is becoming unstuck in a world grappling with the chaos and uncertainty created by the climate crisis.
A 2021 survey of 850 retirement schemes across 12 European countries by Mercer found that less than half of the pension plans in Europe and the UK are considering the investment risks posed by climate change.
For oil-producing countries, the imperative to decouple pensions from fossil fuel production is even more urgent. The UK Divest campaign estimates that British pension funds invest around £128 billion a year in fossil fuels – the equivalent of £2,000 for every adult in the country.
In THE OIL MACHINE, Steve Waygood, head of Aviva Investors’ Global Responsible Investment team, says:
“No one knew when we built finance that basing it on fossil fuel power would cause such chaos. We now know so we have a duty as well as an imperative for our shareholders, for our clients, we have a duty to the world, we have a duty to future generations to now transition rapidly towards a lower carbon system.”
The British oil machine was built just as the flows of fossil-fuel wealth became integrated into a newly expansive financial system, in which the London Stock Exchange was deregulated in the so-called ‘Big Bang’ in the 1980s. Oil lubricated this wider shift in the British economy and as a result the black stuff remains pervasive throughout the City today. ‘We have 3½ degrees of climate change embedded in the London Stock Exchange,’ explains Steve.
“It’s one of the worst exchanges in the world because it’s where many of the world's largest oil and gas companies list. Which means that people’s pensions, savings and investments in the UK are actually invested in financing a future that no-one wants to see, but no-one really realises. It’s only when you stop and ask ‘where’s my pension invested’ that you start to realise that actually there are a number of areas that might not be entirely consistent with your own values, and I would think most right-thinking people will be concerned to ensure that their pension shapes the kind of world they wish to retire in, rather than destroys it.”
Despite some factors exacerbating the link between pensions and oil, such as the growing role of private equity in the oil machine’s operations, Steve sees evidence that a sea-change is occurring:
“So people are beginning to remember the purpose of finance. Banks are there to look after your money, they’re there to make sure it’s safe and that it’s not for example under your mattress, they’re there to make you safer at home.”
In addition to Aviva, several of the largest UK pension providers – Nest, Legal & General, USS and Royal London – have pledged to achieve net zero’ carbon emissions across their wider investment portfolios by 2050 at the latest.
Finance is beginning to also beginning to wake up to the enormous material impacts that the climate crisis has already created, argues Steve:
“In 2020 over $200 billion was lost because of weather-related events, and approaching $100 billion of that was underwritten. Now that’s five times the level that it was two decades ago, adjusted for inflation. […] 3.5 degrees (which is continuing business as usual) is an existential crisis for the insurance sector […] It represents an existential challenge to our business that’s been around for 325 years. We won’t make another 100 if we hit 3 degrees.”
There is mixed evidence as to whether UK savers themselves are willing to demand a transition to net-zero schemes. But if they did, the results could be profound: the Make My Money Matter campaign claims that shifting to a green pension scheme is 21x more effective at cutting carbon than stopping flying, ditching meat and switching energy supplier combined.
Part of the problem, Steve suggests, is the lack of education around how finance and pensions function, but there is also a need for better, clearer regulations around how pension funds can make the shift. Crucially, this approach needs to be worldwide:
“What we now need is our global leaders to realise that the challenge of transitioning the entire global economy is so great that we need to put it on a campaign footing. The same level of mentality that rebuilt Europe after the Second World War […] we now need that same level of mentality applied to ensuring that we don’t create a third world war through the way that we’re generating economic growth.”