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The Actuary The magazine of the Institute & Faculty of Actuaries

Environmental change threatens long-term pension scheme returns

Pension funds will find it hard to maintain healthy financial returns if faced with accelerating climate change and ecosystem collapse, a report published today finds.

The report - commissioned by Aviva Investors and written by non-profit sustainability organisation Forum for the Future - said capital markets are funding activities which are pushing the planet beyond safe environmental limits and threatening investors' long-term interests.

The Sustainable Economy in 2040: a roadmap for capital markets report warned: "Investors as a whole will find it hard to maintain healthy financial returns if faced with accelerating climate change and ecosystem collapse."

And it called on investors, including pension funds, to use their "financial muscle" to create a resilient, stable and sustainable economy and lobby governments for support.

Forum for the Future director of sustainable financial markets Alice Chapple told PP: "Returns just cannot be maintained in some of the environmental and social pressures we are seeing. Our framework shows one cannot carry on depleting those resources and bumping up against those environmental limits ad infinitum.

"When is it we make the decision to stop? Is it when we realise there is no opportunity to stop climate change, or is it planning ahead and saying if we migrate our portfolios gradually over the next 30 years we can manage them in a way holders will benefit from in the long term."

However, Chapple said many pension fund trustees are still nervous about how their fiduciary duty is aligned with taking environmental and social factors into account.

"For trustees there is an opportunity to see from this work it is not about arbitrary, ethical decisions; it is about hard-nosed long-term commercial decisions that will deliver returns for their fund members," she added.

The report offers ten steps to a sustainable economy, including suggesting investors require all companies to report on their long-term strategy to make the business more sustainable; report in their accounts the value of the environmental services and social relationships the business depends on; and that financial institutions should demonstrate that the products and services they offer serve the long-term public good and do not increase risk and instability.

Elsewhere, the report called on governments to offer tax incentives to funds which invest in companies aligned to the vision of a sustainable economy.

Chapple said: "At the moment when we invest in pensions we are given tax relief on the salary. It seems to us there is a really good opportunity for government to say if those investments we are making through pension funds are actually contributing to environmental costs that the government has to clean up, then it is in the government's interests to incentivise behaviour that does not cost them that money in the long run."

Aviva Investors head of socially responsible investment Peter Michaelis said: "Sustainable Economy 2040 shows investors what such an economy could look like and what their role should be in creating it. Crucially it describes the characteristics of major economic sectors, allowing us to select for investment those companies best placed to prosper from the transition to a more sustainable economy."