A report published in October last year exposed a worrying link between pension schemes and climate change.The research, conducted by Make My Money Matter, an organisation which describes itself as a ‘people-powered campaign’, found that schemes fund an estimated 330 million tonnes of carbon emissions every year.
To put the scale of this into context, the pension industry would need to reforest an area half the size of the UK’s entire landmass to offset its total emissions.
The push for a greener pensions landscape is far from a recent development and has attracted some high-profile and unlikely cheerleaders – none more so than filmmaker and Make My Money Matter co-founder Richard Curtis who a couple of years ago said: “It’s time for pensions to help create a world that we all want to retire into and that we want our children to grown up into.”
As such, there is a growing awareness of the pressing need to counteract carbon-intensive activities within pension schemes. In November 2021, it was reported that 132 MPs signed a cross-party letter calling on schemes to divest from fossil fuel companies. The letter stated: “Let us get our house in order by aligning our pension investments with a green and prosperous zero-carbon future that helps to contain global heating to below 1.5°C.”
Offsetting your footprint
Pension schemes’ determination to act here is resulting in the emergence of numerous endeavours. While some of the more established strategies aim to tackle climate change head on – such as investing members’
savings in companies with strong environmental, social, and governance scores – others seek to restore balance.
A practice sitting firmly in the latter camp is the use of carbon offsets – a means of trading emission footprints by saving carbon dioxide elsewhere. So how does this work?
As XPS Pensions Group, a consultancy, covered in a December 2021 report entitled ‘Carbon offset credits – what are they and should pension schemes invest in them?’, the process of carbon offsetting involves an ever-growing range of activities from planting trees to preventing the destruction of natural habitats or building renewable energy generation facilities, through to carbon capture and storage. “For instance, through new technologies that remove carbon dioxide from the air and store it permanently underground,” the report says.
However, whether carbon offsets can help pension schemes hit their net zero targets is a divisive matter, with question marks hanging over its efficacy. “It feels more philanthropic,” says Callum Stewart, head of DC at Hymans Robertson.
“[Carbon offsetting] could be helpful in many ways but is not sufficient enough in itself to deliver net zero goals which is all about real-world impact as opposed to what you are doing in your own small part of the world,” Stewart adds.
Stewart’s view is supported by the lack of schemes getting in on the act, though this is starting to change.
One of the schemes choosing to embrace carbon offsetting is Cushon. Outlining the reasoning behind this, Julius Pursaill, Cushon’s strategic adviser, explains that given the UK must halve its total emissions within the next eight years to achieve its 2050 net zero targets, there is an urgent need to become a carbon-neutral pension now.
“We do not invest pensions savings in offsets, we purchase them with Cushon’s own money to offset the emissions of the investments we have made. Carbon offsetting in this way is a useful short-term tool to deliver a ‘net zero now’ product, but it’s not a sustainable solution for the medium to long term.”
As Pursaill notes, it is not the members funding the offsets within their investments – the scheme funder is purchasing them with its own money to offset the emissions of the investments it has made.
Other proponents include XPS, which reached an important milestone in November 2021. The Group announced that it had become net carbon neutral by offsetting carbon emissions across its entire value chain “as part of its journey to limit the business’s environmental impact while helping clients and stakeholders also move towards a more sustainable future.”
The Group said that its Scope 1, 2 and 3 carbon emissions will be offset by the purchase of high-quality, UN-approved renewable energy. But carbon offsetting is far from a one-trick-pony and can be harnessed in other ways, too.
Stewart has seen significant take up within flexible benefits. “Alongside the pension scheme, salary and other benefits present the opportunity for employees to pay into a carbon offsets scheme to offset their own footprint.”
Trading places
Other recent developments in the carbon trading space include outcomes from Cop26, principally the rules under Article 6, which set out a clear framework for the standardisation of the international trading of carbon credits.
Former Bank of England governor Mark Carney has been vocal on the subject, leading a taskforce which is proposing a $100bn voluntary carbon offsets markets. The market works by carbon emitters offsetting their unavoidable emissions by purchasing carbon credits.
Carney conceded, however, the market will focus on the offsets at the end of the process of reducing absolute emissions. In other words, the residual offsets.
But Carney’s proposal has come under fire, most notably from climate activist Greta Thunberg who claimed, through a series of tweets, that the offsets market increases the risk of greenwashing.
Market data suggests trading carbon presents a potentially lucrative investment opportunity. The EU carbon permits market has more than doubled in the past 12 months (at the time of writing), piquing the interests of investors seeking ways to combine climate action with asset growth.
In Pursaill’s view, the EU carbon permits market serves only a single purpose: to drive up the price of carbon. “The EU is not legally permitted to introduce taxes, and that includes a Europe-wide carbon tax, so the permits market is the next best thing. It has specific ratchet mechanisms deliberately designed to push the carbon price up, so expect volatility on the upside: if the price isn’t increasing, the permits aren’t really putting pressure on companies to decarbonise,” Pursaill adds.
On the domestic front, Dan Mikulskis, partner at Lane Clark and Peacock, says the carbon emissions trading system – otherwise known as ETS – price is worth following.
“The UK’s ETS launched last year and covers a third of UK emissions including internal
flights and power generation,” Mikulskis explains, adding that a broader carbon tax could well be on its way, and it is the most obvious path through which climate risks could be financialised in the short term.
“Asset owners would be well advised to be on top of these potential risks, but many may be unaware of the impact on their portfolio of a carbon price of, say, £100 or £200,” he adds.
Calculating the impact
A further strand to the debate is carbon accounting, a process used by firms to calculate the amount of carbon being emitted. Can this help schemes move towards their net zero targets? According to Mikulskis, net zero is not an accounting or offsetting exercise – it is a long-term stewardship and standard setting exercise.
“Emissions data are backward looking and frequently well out of date by the time they are available. Asset owners should base investment decisions on forward-looking judgements on businesses around their alignment to net zero as this leads to better investment decisions.”
What next?
The inherent nature of carbon offsetting means it will always be contentious. That said, it is worth remembering the practice is still in its infancy, with the potential to mature over coming years.
Cushon’s Pursaill recognises this, as despite being an advocate of carbon offsetting, he is conscious of the imperfections within Cushon’s current approach as well as its reliance on offsets to achieve net zero.
Pursaill outlines three ways Cushon aims to correct this: being transparent on what it means by net zero now; providing a clear plan to address these imperfections, together with short-term milestones against which it can be measured; and establishing a clear financial incentive to deliver on plans by paying for offsets out of Cushon’s own money.
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