Two months ago Nest, the largest pension scheme in the UK with 9million savers, committed to cutting carbon out of its investment portfolio.
It was the first scheme to publicly commit to aligning with the Paris Agreement goals to keep global temperature rises within 1.5C above pre-industrial levels by 2050.
A month later, the Department of Work and Pensions announced plans to make it mandatory for all of Britain’s largest pension funds to disclose their carbon footprint and exposure.
If global temperatures increase on their current trajectory, studies show the UK could experience widespread flooding and searing 48C heatwaves
While cutting carbon to slow the damage that global warming is inflicting on the planet is environmentally responsible, experts are increasingly warning that it’s also financially responsible.
As part of This is Money’s greener finance series, we asked Diandra Soobiah, Nest’s head of responsible investment, to reveal why cutting carbon is the right thing to do to protect people’s pensions.
Diandra Soobiah, Nest’s head of responsible investment
The world is facing a climate catastrophe. Overwhelming scientific evidence suggests our way of life is being threatened by what we do and, more importantly, what we take for granted.
If global temperatures increase on their current trajectory, studies show the UK could experience widespread flooding and searing 48C heatwaves, devastation to wildlife and food crops and increasing risk of diseases like Zika or dengue fever. All in our lifetime.
It’s pretty terrifying, isn’t it? To hear our future is at risk in this way. It’s one of the reasons more than half of all UK adults are worried about the impact of climate change on their lives.
It’s also something the pensions industry is slowly waking up to. The realisation that we could help our savers build up a decent nest egg through their working lives, just to find they retire into a world ravaged by climate change.
But what if we can help shape a more positive future while still achieving that decent nest egg?
Investing our members’ savings in a way that helps fight climate change and delivers a healthy savings pot for them to enjoy at retirement. Well as it turns out, savers are likely to be worse off financially if their investments don’t address climate change.
Our investment analysis concludes that climate change poses a serious and material risk to investment performance.
Resources from fossil fuels will likely become too expensive to extract from the ground, from either rising carbon taxes or a lack of consumer demand.
Being a heavy polluter could start impacting how profitable a company is as governments penalise heavy carbon emitters.
If we ignore the risks of climate change, we ignore the potential financial fallout too. We are therefore encouraging the heaviest polluters to reduce their carbon footprint and make changes to their business activities that will ensure their survival in a low carbon world.
We also see huge investment opportunities in low-carbon technology that are crucial to a low carbon future.
We’ve already invested more than £100million in things like solar and wind farms, because these infrastructure projects should be steady, long-term earners for our savers as the demand for renewable energy grows.
The evidence on climate change and the urgent need to address it continues to grow with every passing day. The financial case for acting now and reducing the carbon footprint of our investments is clear.
And the sooner we act as investors, the more money we’re likely to make for our savers from this global shift away from fossil fuels.
The evidence on climate change and the urgent need to address it grows every passing day
That’s why Nest recently launched a new climate change policy which aims to make our investments net zero by 2050 or earlier. To do that, we expect to halve our carbon emissions by 2030.
We’ll no longer invest in certain industries we think are incompatible with our net zero goal, such as Artic exploration of oil and gas, and thermal coal mining and power generation.
We’ll take this money and put it into investments that’ll continue to perform strongly over the coming years and decades. Some that will be a solution to climate change and others that will thrive in a low carbon world.
Some of our 9 million savers will be with us for potentially 40 to 50 years. Our approach must be sustainable over that time frame and continue to drive the right returns long into the future.
Coronavirus has provided an opportunity to reset the economy for a more sustainable future.
A green recovery would not only avert catastrophic damage to our planet but help millions prosperously retire into a world that is habitable and sustainable for generations to come.
At Nest we see it as part of our core responsibility to help create this world our savers will want to retire into. In good conscience we can’t stand by and do nothing about climate change. And now is the time to act.