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Pension Fund Investments in Hard-to-Abate Sectors: A Story Between Green Finance and Greenwashing

By Anais Penin

Edited by Mélanie Fourtanier & Federico Durante

Despite their efforts to mitigate environmental impact, some countries including the UK, Luxembourg and Switzerland, continue to invest pension funds in profitable ‘green funds’. However, green funds could be seen as ‘dirty’ since they tend to finance hard-to-abate sectors. This sparks a global debate: the investment dilemma between potentially impacting the financial security of retirement pensions.

©Friends of the Earth Scotland

Green Investment Funds: Balancing Sustainability Claims and Reality

The number of green investment funds is growing significantly and offers an interesting green option for investors. However, these funds are significantly exposed to companies that are not aligned with the Paris Agreement, which raises a possible issue of Greenwashing.

Indeed, as the Guardian reported, numbers show that Blackrock, State Street, and Legal & General hold one billion dollars (920 million euros) in bonds issued by fossil fuels in ESG funds. This raises questions about the validity of sustainability claims made by asset managers, and what ought to be called ‘green’.

Sustainable Finance: Charting the Future of Responsible Investments

Sustainable finance consists of environmental, social, and governance (ESG) considerations in investment decisions. This article focuses on the environmental part of sustainable finance. There are different ways of investing in green.

One can first invest in obvious green companies such as Patagonia, companies deeply committed to the environment. In this case, it is simple to identify and classify green companies and projects. On the other hand, a debate is emerging about the transition of companies in the most polluting sectors.

These industries are referred to as "hard-to-abate" since it takes considerable time and resources to mitigate their environmental impact and switch to more environmentally friendly options. Hard-to-abate industries include sectors like cement, gas and other petrochemicals, and in aggregate account for about 30 per cent of the world’s greenhouse gas emissions.

Companies in the latter category cannot become green overnight, and they need investment to make their transition to greener practices. Charting the course for companies operating in sectors with environmental impacts involves navigating the delicate balance between financial returns and broader environmental considerations.

Some claim that the existing strategies in the financial sector do not offer a sufficient answer to the climate emergency.

Navigating Green Investments: Fossil Fuel Shadows in Pension Funds

After gaining an understanding of the workings and dysfunctionalities of sustainable finance, especially of the possibility of hidden investments in ‘hard-to-abate sectors’, individuals are often hesitant about investing in green funds.

Yet, banks managing pension funds are probably already doing it. In fact, by investing for your retirement, you entrust your money to your bank, which then invests it in various funds. Sustainable funds are very profitable today and are growing fast, making these a great investment for banks.

However, these funds tend to feature the names of fossil fuel companies such as Total. According to the Financial Times, green private pension funds sometimes inadvertently contribute to the financing of oil and gas companies.

After scientists proved that excessive consumption of fossil fuels is leading to a global environmental disaster, global pension funds have already made efforts to align their portfolios with environmental goals.

Still, they rarely withdraw from oil companies. Some players, such as Platform London, are calling for greater transparency regarding the investments made by pension funds.

There are growing concerns about the durability and future return of oil investments, given that many countries aspire to the development of and transition to renewable or nuclear energies.

Green Claims vs Fossil Finance: Luxembourg, Switzerland, and the UK

Even though Luxembourg, Switzerland, and the UK are part of the Paris Agreements and have set up several green initiatives, they still invest in fossil fuel industries.

Luxembourg’s “sustainably managed” pension funds, including ESG-labeled sub-funds, invested in some of the biggest polluters around the globe.

According to Martina Holbach, Climate and Finance Campaigner at Greenpeace Luxembourg, “continuing to invest in fossil fuels while claiming to be ‘green’ is an insult to common sense and incompatible with sustainable investment”.

However, Luxembourg is certainly not the only country to contribute to the financing of hard-to-abate sectors.

Over 20 billion pounds (23.04 billion euros) in UK pension money is invested in Shell, contradicting savers’ expectations that are not in favour of investing money in funding companies driving fossil fuel expansion.

Additionally, in a documentary called ‘Green Funds, the Big Illusion’, ARTE studied the case of Compensuiss, a public company responsible for investing in Swiss AVS retirement pensions. Compensuiss invests the money from pension contributions on the stock market in profitable green funds.

The priority of these investors is to ensure that compensation funds have the liquidity to pay pensions: their goal is to manage the pension fund in the interests of those insured.

37 billion dollars (33.9 billion euros) have been invested in total, with 122 million invested in coal, 300 million in the automobile sector, and over a billion in aviation. Compensuiss did not publish a list of its investments before the publication of ARTE’s documentary, amid concerns over transparency.

In essence, Luxembourg and Switzerland ought to shift their citizens' finances away from fossil fuel investments. The contradiction of "sustainably managed'' pension funds in Luxembourg and Switzerland investing in major polluters emphasises the pressing need to align financial practices with sustainability goals. The case of Compensuiss in Switzerland reveals challenges in achieving transparency and genuine green finance, highlighting a clear imperative to bridge the gap between rhetoric and action in global sustainable investing.

Tackling Greenwashing and Tracing Pension Fund Investments

The disclosure of investment portfolios is essential to meet the need for transparency and information in sustainable finance. People have the right to know how their money is invested, which could trigger a much-needed public debate on this issue.

Sustainable finance is a way of redistributing capital to where it is needed most and can help mitigate the negative climate externalities. Even if not everyone is entirely convinced by the dynamics of sustainable finance, it is imperative to put pressure on companies and investment firms to improve their transparency, educate clients, and act.

This challenge stems from the inherent dilemma of securing the profits needed for pensions while striving to create a better world, making transparency a vital bridge between these contradictory objectives.

Promoting transparency in the current financial landscape not only encourages accountability but also acts as a motivator for well-informed decision-making.

Encouraging open disclosure about investment strategies and the environmental consequences they entail is essential to coordinating financial aims with global sustainability objectives.

It forces a revaluation of investment approaches, driving a necessary transition toward a more cautious and responsible strategy for preserving the planet while guaranteeing financial futures."

The Path to Take

In the essential but contradictory world of green finance, the 'Green Funds or Greenwashing' dilemma persists. Pension funds tend to invest in 'hard-to-abate' sectors, sparking a global debate on whether we should support the transition of these sectors or completely divest from them.

The lack of transparency in these investments underscores the urgency for a public dialogue.

The paradox of supporting fossil fuel companies through our pension funds is stumbled upon when exploring the world of sustainable finance. The central question remains: how can we balance financial security in retirement with our obligation to our obligation to preserve the planet since we depend on it?

Transparency and regulatory governance stand as critical links between these seemingly conflicting objectives.

Sources: European Investment Bank, Financial Times, Guardian, Siemens, UK Gov

Written by Anais Penin

November 2023

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