Energy Finance

Pension funds could make or break the future of renewable energy

The world’s wealth is packed in pension funds, and a large part of the reserve comes from fossil fuel investments. According to a report from the Organization for Economic Co-operation and Development (OECD), pension funds’ value is going up despite the growing unpopularity of fossil fuels. Investments into coal, oil, gas, and other strong-rooted and long-standing sectors are the backbones of pension funds. Despite the world migrating from conventional energy to cleaner energy, pension investments’ value is rising steadily.

Countries like Norway have seen a tremendous increase in investments in oil and gas in 2019. The trend is the same in other wealthy countries like the United States and the United Kingdom. According to OECD, the value of pension funds across its member countries rocketed to over $32 trillion in 2019, a 13.9% increase from 2018. As the world transitions to green energy, there is concern over the pension fund’s dependence on oil and gas. It seems like the world is not ready to give up the wealth of fossil fuels. Some of the pension fund managers are shifting their interest towards clean energy.

In 2020, the National Employment Savings Trust, a giant pension manager in the UK, revealed plans to ditch fossil fuels for renewables. In 2021, Aegon, an insurance, pensions, and asset management firm, announced it was pledging to be carbon neutral by 2050 in its auto-enrolment funds. The company also aims to reduce its carbon emissions by 50% by the end of the decade.

Pension funds consist of taxpayer’s money, private investments, and government backing. They form a core branch of the world economy. Lucrative investments can sometimes forego social and environmental responsibility while chasing profits. There is a need for pension funds to create a balance between gains and responsible investment. “Pension funds are already making significant efforts with regard to environmental, social and corporate governance (ESG),” said Tim Orton, managing director for investment solutions at Aegon.

“From an investment perspective, clean energy is at quite an early stage, and key considerations for both trustees and providers are the liquidity and risk of any asset in which a fund invests,” added Orton. However, options for renewable energy should be voluntary. Pension funds should create green funds and let members decide to take it or leave it.

“It is important for fund providers to have a broad range of ESG solutions out with traditional default. Aegon has over 200 ESG funds available on our Aegon Retirement Choices platform that members can look through to see which matches their ESG convictions best,” explained Orton. There are practical challenges for sustainable investment by pension funds and other financial firms. Renewable energy startups and pioneers are inconsistent and volatile financially.

“Clean energy companies typically show higher volatility than many established companies that are conventionally held by pension funds and have less liquidity, so there are some challenges to mainstream funds investing in the sector,” said Orton. “As such, we need to consider how reaching net-zero will impact the cost and current risk/return of the default solution,” added Orton.

Clean energy investments could also bridge the gap between the wealthy as well as the poor. “Environmental, social, as well as governance issues are all included in ESG investing. It isn’t just concerned with renewable energy.”

About the author

Andrzej Kowalski