Pension funds must be a positive part of regenerative capitalism

Investment consultancy and fiduciary management services influence the pension outcomes for millions of people and effectively determine the flow and destination of institutional capital.

More than 10m people have started saving via a workplace pension under auto-enrolment – a policy whereby employers must pay into a pension for workers.

While this has successfully led to millions more saving towards their retirement, few are engaged with their pension fund. Few indeed know what their funds are invested in, for instance, that, despite the declaration of a climate emergency, they are likely to be unwittingly investing in fossil fuel companies via workplace schemes.

Pension schemes should take the lead to support solutions to the world’s most pressing challenges in sectors such as sustainable agriculture, affordable housing, accessible healthcare and clean technology

This is despite increasing pressure from policymakers who are demanding that pension funds ensure they are taking environmental, social and governance issues into account before choosing investments (as per the recently updated Financial Reporting Council UK stewardship code).

Sustainability is key for investment

Whilst we see a growing desire among people themselves to support ‘responsible’ business, are providers adequately conscious of their preferences when they invest people’s money despite regulatory pressure to do so?

The UK Sustainable Investment and Finance Association have recently released a report looking at how pensions are approaching climate change and ESG issues following recent UK reforms, and have found "pension scheme trustees’ policies on ESG factors like climate change are vague and non-committal, and many have not even published their policies - despite their legal obligation to do so".

Long-term investors, like pension funds, must make deploying capital to responsible and sustainable business practices a key part of the way they invest. As the Prince of Wales said at the recent World Economic Forum meeting in Davos, “just think for a moment what good is all the extra wealth in the world gained from business as usual if you can do nothing with it except watch it burn in catastrophic conditions”. 

The starting point for this is an acceptance that the current “business as usual” model is dead and an acceptance that it is often a driver of, and complicit in climate change, environmental degradation and social injustice. Long term investment is not just about a financial return but should also seek to finance the future we want.

Our current form of capitalism and the institutional investment that drives it threatens future value, and people’s futures. Sustainable investment, on the contrary, creates it, placing a big emphasis on managing risks over multiple horizons; ranging from the risk of losses in a severe market dislocation to long-term risks, such as climate change.

Pension schemes should take lead

Few investors do this in a meaningful way. The UK’s £30bn Brunel Pension Partnership has shown real leadership here by recently launching an ambitious new climate policy calling on companies and investment managers to become more climate aware or face removal from its portfolios.

Pension funds have the power, and responsibility, to make this a reality. They should take the lead to support solutions to the world’s most pressing challenges in sectors such as sustainable agriculture, affordable housing, accessible healthcare and clean technology. This needs to become the norm for institutional investors.

Political leadership around the need for genuine change is growing in part fuelled by rising social pressure. The recent UK-Africa Summit was a timely event that highlighted the evolution of the ‘investment case’ as we know it today.

The Prime Minister Boris Johnson himself echoed this sentiment, proclaiming ‘sustainable thinking applies to our shared environment every bit as much as it does to our common business interests’ when highlighting the government’s sustainable, forward-thinking nature of investment in parts of Africa. The global need for low-carbon, sustainable and just development is increasingly self-evident.

Make sustainable decisions now

So, what’ll it be? Bite the bullet and get ahead of the problem the Bank of England Governor Mark Carney calls the ‘tragedy of the horizon’ before it becomes unmanageable, or not? The investment sector in much of the developed world is beginning to get to grips with this need for change and the power of this capital is critical to that transition.

Business leaders now need to make decisions that are sustainable for their business and ensure a more symbiotic relationship with the wider social and natural environment.

The smartest business leaders are slowly realising that making decisions through a sustainable lens is ultimately good for the business and its stakeholders in the long run, including its investor base. The smartest investors will be funding these businesses and enterprises for that very reason. By doing so, we can all play our part in building a more resilient and regenerative form of capitalism.

Gordon Power is co-founder and chief investment officer and Richard Burrett is chief sustainability officer of Earth Capital