9 April 2018
We have a generation of socially-conscious millennials, many of whom care passionately about climate change and sustainability. We also have a generation of future pensioners who are not engaging with retirement savings issues. Claire Jones analyses where, and how, we can “join the dots” and hence help Future Pensioners see sustainable investing as a financial issue, as well as an ethical one.
Anecdotally, we know that young people today are, by and large, a passionate bunch – particularly when it comes to sustainability and environmental, social and governance (ESG) issues. In fact, according to the World Economic Forum’s 2017 Global Shapers Survey, young people, aged 18-35, around the world consider climate change to be the world’s most serious problem, bar none.
The challenge facing the pensions industry is to bridge the gap between socially conscious younger generations who care deeply about ESG factors, and engagement in retirement saving. There are natural links between retirement savings and responsible investment strategies, but none of these are communicated to young savers.
As the PLSA’s Luke Hildyard points out, “climate change is not just an ethical issue for pension fund governance bodies, but a major threat to financial stability”.
Climate factors affect investment performance. A study from Cambridge Institute for Sustainability Leadership revealed that “even in the short term, climate risks pose a significant threat to investment portfolio performance” and “investors cannot entirely shield themselves from the exposure to climate change”.
Largely viewed as a longer term issue, the more immediate risk to pension fund investments cannot be overlooked. The Cambridge study showed, for instance, how equity portfolios could lose up to 45% of their value in the short-term due to market participants reassessing the significance of climate risks.
Such stark warnings come as the UK Government is also turning its attention to responsible investment. In March, Mary Creagh MP, chairwoman of the parliamentary Environmental Audit Committee, wrote to the top 25 UK pension funds – which have a combined £555 billion in assets under management – to explore how funds are protecting people’s pensions from the financial risks associated with climate change.
The companies in an investment portfolio can be affected drastically and quickly, with new energy sources giving rise to new disruptive companies, as well as impacting the value of existing companies (fossil fuel companies may lose value as low-carbon energy methods surge, for example).
Governance bodies and investment managers need to consider their approach to the financial risks associated with climate change, and not mis-interpret their fiduciary duty as simply ‘maximising short-term returns’. But this is also an opportunity to catalyse engagement in retirement and savings issues. The industry must now reach out to the untapped potential of passionate millennials, harness their fervour, and fully engage them in making financial provision for the future (as well as saving the world!).
LCP’s Future Pensioner campaign seeks to look at ways the industry can encourage younger generations to save for pensions that are “fit for the future” but the “uncomfortable truth” is that there needs to be a future worth saving for. ShareAction has recently explored similar themes and the more voices joining this debate, the better.