Pension funds are endangering the long-term value of their investments by continuing to pour money into environmentally unfriendly businesses, according to research backed by the United Nations.
A report to be published in advance of the UN climate change conference in Copenhagen in December will urge funds to switch investment from traditional energy-intensive industries to low-carbon alternatives.
The study, prepared by Trucost, a consultant, will say that while pension funds may make money in the short term through backing environmentally un-sound industries, they are putting their long-term health — and that of the wider economy — in jeopardy.
“The global economy will bear the cost of unsustainable use of natural goods and services,” Trucost said. “Pensions funds should have an interest in reducing environmental threats as their investments are exposed to these hidden, but real, costs.”
As an example, the UN report will cite evidence that air pollution will cut gross domestic product in the European Union by 1.7% a year to explain how pension funds could in the long term be harmed by investing in companies whose operations have an adverse effect on air quality. The potential losses are far greater when taking into account the broader impacts of global warming, such as rising sea levels, which would destroy property and food supplies. The costs of continuing to emit dangerous levels of carbon dioxide are estimated at $1.4 trillion (£880 billion) a year.
The Stern Review on the Economics of Climate Change said the consequences of failing to prevent rising temperatures could be as grave as a depression-level collapse that could permanently wipe 20% from global GDP by the end of the century. Pension funds would be affected because their ability to meet liabilities depends on investment growth.
Fund managers have a duty to investors to consider the impact that carbon markets and other emissions reduction regulations will have on companies’ performance, said Penny Shepherd, chief executive of UKSIF, the sustainable investment and finance association. “Companies need to question whether their pension investments consider the impact climate change will have on wealth creation over the next 40 years,” she said.
Pension funds were mentioned as an important source of low-carbon finance during the Labour party conference last week. “Pension funds could definitely play a bigger role in helping the UK to develop new green technologies and infrastructure,” said Joan Ruddock, energy and climate change minister.
James Gifford, executive director of Principles for Responsible Investment, the UN group that commissioned the report, said: “There is no doubt pension funds will be the source of much of the capital that is required for the transition to the low-carbon economy.
“But pension funds are not charities — they need to fulfil their duties to seek good returns. Governments need to put in place the carbon-pricing structures to ensure that the transition to a low-carbon economy is also the most prudent investment strategy for large investors.”
Alistair Darling, the chancellor, allocated £405m in his budget this year to encourage the manufacture and take-up of low-carbon goods and services.
The International Energy Agency has estimated that $10 trillion must be invested globally in low-carbon technologies by 2030 to stave off the temperature increases that could cause permanent damage to the environment.
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