Katharina Lindmeier is a responsible investment manager at Nest.
Back in 2019, Mark Carney asked a clear and inescapable question of every asset manager, pension fund and financial institution: what’s your plan for climate change?
His challenge was based on science. The four-degree increase in global temperatures we are currently heading towards could cause searing heatwaves, rising sea levels and untold devastation to our way of life. The impact on investments, as well as directly on savers, will be significant and disruptive.
As a pension scheme with more than 9 million members, climate change has been on our radar for some time and we have come to two clear conclusions:
- Just like coronavirus, climate change poses a clear investment risk to our portfolio
- Our savers do not want to save throughout their life and retire into a world devastated by climate change
Both are different points, but each play an important part in our thought process.
Millions of Nest’s members will be saving with us for decades. Over this time horizon, we believe climate change will present significant investment risks for our members.
Resources such as coal, for example, will likely become too expensive to extract from the ground, from either rising carbon taxes or a lack of consumer demand for fossil fuels. The Bank of England has previously estimated that £16trn of assets could be wiped out this way.
Additionally, being a heavy polluter could impact how profitable a company is, in the short and long term. The physical risks of climate change are clear, but the transition to a greener economy could mean sectors of the economy face big shifts in asset values or higher costs of doing business.
So, changes are needed with initial research showing that portfolios perform better when transitioning to a low-carbon economy in an orderly manner, rather than a sudden policy shift. The time to act is now.
But while we want to help our members achieve the best risk-adjusted returns, we also want to engage with them and see how they feel about climate change. How much do they care if their pension scheme is helping to tackle it?
What is clear is that pension savers, not just those with Nest, want to see action: when asked, 65% of savers believed their pension should be invested in a way that reduces the impact of climate change. Just 4% strongly disagreed.
Four out of five adults also believed it important that the economic recovery from coronavirus takes climate change into account.
This makes complete sense. A pension is a means for people to be secure in retirement, but a world ravaged by climate change will be more expensive for our savers to retire into, meaning their pension will not spread as far as it should.
How can we offer them the prospect of a better retirement if we ignore the world they will be retiring into? Climate change puts retirements at risk.
Our research on climate change led us to launch a new investment policy in July, setting the ambition of being a net-zero investor by 2050 with an expectation of halving carbon emissions by the end of this decade.
Over the next three years we will be working with our fund managers to identify how we can help achieve the net-zero goal across our portfolio. We have already taken some strong steps, such as moving 45% of our portfolio into climate aware strategies, but we know there is much more work to do.
Any fund manager wanting to work with us must be able to clearly demonstrate that they can help us achieve our net-zero ambition. This expectation will become a requirement of our standard tender process for new mandates.
We believe our new policy sets out a clear vision of where we are heading. We will now work on taking the necessary steps to become net-zero, using our close partnerships with fund managers to amplify our impact and co-ordinate activities towards tackling climate change.
