More and more investors are switching on to the risks associated with climate change. Over recent years there has been the higher profile to climate issues from the Greta effect and direct action from the likes of Extinction Rebellion.
There are almost daily news items of devastating extreme weather events all around the world...the flooding in Germany, wildfires in Turkey, Greece, California and Siberia this summer. Globally, July was officially the hottest month on record....the past five years have been the warmest years ever. The ice polar sheets are melting at a rapid pace.
It's clear the free market capitalism is not working and at some point in the near future governments will respond to the ever increasing public pressure and intervene as they did in relation to Covid. One option could be the introduction of a global carbon tax...basically a tax on carbon pollution (fossil fuels) which would dramatically change the investing landscape. I'm not sure whether capitalism can actually go 'green' as its basic idea is all about growth whereas green is about the limits to growth on a finite planet...however it can certainly accommodate greener and more sustainable ways of doing things.
Investors, small and large, are part owners of the companies held in their portfolio. Do they really want to own a part of a company involved in fossil fuels such as coal mining or oil & gas exploration? More and more are thinking about this and coming to the conclusion that no, they don't.
It's now 3 years since I started to move my investments away from fossil fuels and into more climate-friendly areas. Here's my SIPP drawdown review for the year to June 2019 recording the sale of City of London, Edinburgh and Vanguard Lifestrategy and a switch to Global Clean Energy and renewable energy infrastructure funds.
Most people in work - whether self-employed or employed in the private or public sector will pay into a pension. This is more so today since the roll-out of auto enrolment.
But how do you know that your monthly contributions are not propping up these polluting fossil fuel industries?
What will the future be like in 20 or 30 years time when savers are ready to retire and take that pension? Probably a very different world than we see today for sure.
Most of these pensions will be invested in a range of diversified funds. However, a recent analysis of one third of global funds with assets of $27 trillion revealed that less than 1% were aligned with the Paris Agreement and limiting temperatures to well below 2.0C. The study carried out by non-profit charity CDP looked at the holdings in 16,500 investment funds and revealed that just 158 funds were compatible with Paris whilst over 8,000 were aligned with a temperature of 2.75C.
Low cost passive investing has become more popular in recent years. However, around one third of the average global index fund is made up of companies that are doing more harm than good and comprise of industries that continue to accelerate the climate crisis. Therefore it's most likely that your pension will be invested in funds which are not aligned with Paris and in companies that continue to add to the climate crisis.
Yet the majority of people say they want their investments to take account of people and planet as well as profits and say that responsible and sustainable investment is important.
UK pensions hold around £3 trillion invested in the global economy...it could make a big difference if it was aligned with Paris and invested in responsible companies.
A self-invested personal pension is a way for investors to take control over where their hard-earned savings are invested. If you are vegan you would not want to invest in meat companies. If you are concerned about the environment and climate change, you will want to avoid the fossil fuel companies and the big banks which finance their operations. You would want to see your funds invested more in green technology and sustainable solutions.
Most people do not really know where their pensions are invested...maybe ignorance is bliss! But it is definitely becoming easier to find greener options such as iShares World SRI ETF covered here iShares Clean Energy ETF covered here or BG Positive Change...here - a sample of just three funds held in my green portfolio.
For those who are trying to reduce their personal carbon footprint, research from Make My Money Matter suggests that greening your pension is a staggering 21x more powerful than stopping flying, going veggie and changing energy supplier combined or 20x more effective than switching to an electric car!
Obviously it would make things a lot easier for ordinary savers if the whole industry became much greener but the research from CDP suggests this is just not happening.
It's long overdue for the global finance sector to get its act together on climate change. Former Bank of England governor Mark Carney has recently launched a net zero alliance of financial service which includes index providers, credit rating agencies and stock exchanges. The aim is to align all products and services to achieving net zero emissions by 2050 at the latest. The alliance say they have mobilised firms controlling 40% of global assets and worth $130 trillion to align with the 1.5C warming limit. (I suspect it may take a little while before the banks stop pouring billions into fossil fuels).
This should compliment the net zero banking alliance and the net zero insurance alliance both established earlier this year.
At the COP26 gathering this week, the Chancellor outlined plans for new rules for large UK firms to show how they are meeting climate reduction targets. By 2023 they will have to show how their business will move to zero carbon emissions in line with the governments 2050 net zero pledge.
These initiatives are all heading in the right direction but with less than 1% of global companies currently aligned with Paris, there's a long way to go. However, we have to remain optimistic...the world will transition to a low carbon economy and this process will speed up...companies will inevitably start to adjust to the new reality (some more quickly than others), the markets will adjust and the money will start to move away from fossil fuels and into more sustainable pathways. The young people are demanding change...they have the most to lose in the long term but it will take some time.
In the meantime, investors can be a part of this process and make an immediate impact on the climate by taking more control of how and where their savings are invested by going DIY! Of course, we need to also see some big moves from governments and big business, but we can all make a contribution...however small. When we feel we are making a difference, we feel empowered and just better all round.
When all said and done, a pension or SIPP is just a tax efficient way of saving for a more comfortable retirement in 20, 30 or maybe 40 years time. But the climate scientists all agree...unprecedented action is required now if we are to limit global warming to 1.5C. This will require urgent coordinated action from all governments, especially the G20 as well as the global business community and individuals. We all have a part to play.
If you manage your own SIPP and have made a decision to align your investments with climate in mind, feel free to leave a comment below and share your thoughts with others.