Why pensions are the key to protecting our planet
When it comes to sustainability, we’re not going to solve the issue of climate change by individuals ensuring that what they invest in aligns with the UN Sustainable Development Goals. Instead, we need to look at this through the lens of the asset management industry. The asset managers are like the product manufacturers; they ultimately control a very large share of investors’ assets, and then distribute their funds via the private banks and IFAs.
The biggest chunk of influential capital out there is in the hands of the large, global pension funds. They and the trustees need to take a big chunk of the responsibility in leading the way on influencing capital flows into investments that have a positive impact of climate change. The pension funds will tell you that their number one duty is to produce a return in line with the requirements of the fund to meet the requirements of the existing pensioners or for the pensioner to draw down.
If investors have got money that’s not sitting within a structure where they’re not going to crystallise capital gains by switching from one investment into another, the question is whether they are prepared to pay that tax in order to reflect their views from an ESG [environmental, social and governance] perspective. I think some would say yes, absolutely – that’s what they are prepared to pay to ensure that they’re investing in line with their views on sustainability. For other people that could be a lot of money, and they will question how that fits with their desire to be able to live well in later life.
That’s why this must be an industry-wide effort. This space will evolve to a point where there will, one day, not be an investment you can hold in a polluter, purely because those businesses will stop being supported. The way the capital flows will ultimately drive the way that businesses and people behave. Every fund out there, every investment out there, will become a sustainable investment because the polluters simply won’t exist.
The big drivers of change, though – as is always the case – are tax and regulation. It’s tax and regulation, in the context of the investing organisations that work on behalf of private investors, that ultimately change behaviour faster than many other things. They are now required to ask if investors want to take ESG issues into account in their investment portfolios and the mandate they have with them. And the answer, I think, will increasingly become yes.