May 04, 2012
Sustainable Investment by Pension Funds Total Less than One Percent of Assets
by Robert Kropp
Despite the necessity of a low-carbon economy and the opportunities for investment in the
transition, efforts by governments and institutional investors remain inadequate. Second of a
Recently published studies from Ceres and E
IRIS demonstrate that corporate sustainability efforts are inconsistent at best, and are not
enough to help guide business and society in the transition to the low-carbon economy essential to
a near future of resource scarcity.
With the possible exception of governments,
pension funds, with portfolios large and varied enough to designate them as universal owners, seem
especially well-positioned to pressure corporations to increase their sustainability efforts. And
with 250 asset owners among the more than 1,000 signatories to the United Nations' Principles for Responsible Investment (PRI)—20 of
which are located in the US—there appears to be considerable commitment among pension funds to the
aspirations of environmental, social, and corporate governance (ESG) considerations and corporate
A working paper published last
fall by the Organization for Economic Co-operation
and Development (OECD) notes that with a total of some $28 trillion in assets, the involvement
of pension funds is essential to a successful transition to a low-carbon and climate resilient
Such a transition, OECD reports, "over the next 20 years to 2030 will
require significant investment and consequently private sources of capital on a much larger scale
than previously." According to some estimates, as much as 85% of funding for the transition will
have to come from private investment. However, the report continues, "pension funds' asset
allocation to such green investments remains low."
"Governments have a role to play in
ensuring that attractive opportunities and instruments are available to pension funds and
institutional investors," according to the report. However, regulatory inaction, perhaps most
prominent in the US, is not the only impediment to the uptake of sustainable investing by pension
funds; the funds themselves share responsibility for the slow pace of the transition: "Other
barriers to investment include a lack of appropriate investment vehicles and market liquidity,
scale issues, regulatory disincentives and lack of knowledge, track record and expertise among
pension funds about these investments and their associated risks."
"Pension funds' asset
allocation to such green investments (particularly sustainable energy sources and clean technology)
remains low (less than 1%)," OECD reports.
The ranges of investment needed for the
transition is considerable, as OECD points out in the report. Six financing needs gathered from a
variety of sources indicate that such investments could exceed $10 trillion per year. Such a level
of financing cannot come from public sources, especially at a time when government spending is
constrained. Yet, with the proper allocation of public funding that is available, the potential for
private investment is considerable.
However, "Such investments will only be made if
investors are able to earn adequate risk-adjusted returns and if appropriate market structures are
in place to access this capital," the report warns. "There must be transparent, long-term and
certain regulations governing carbon emissions, renewable energy and energy efficiency."
"Incentives can only come from government in the form of guarantees, tax incentives and with
the help of innovative institutions like the proposed green infrastructure and investment banks,"
the report continues.
Yet governments can pressure pension funds to invest in more
sustainable ways as well. "Pension funds can also be encouraged (or even required) to consider
environmental, and social and governance (ESG) issues in their investment analysis," the report
A second report, published
in April by the International Trade Union
Confederation (ITUC), demonstrates the benefits of investment in a green economy, not only for
sustainable development but for job creation as well.
According to the report, "Economic
research by the Millennium
Institute forecast that investments of 2% of GDP in the green economy over each of the next 5
years in 12 countries could create up to 48 million new jobs."
In the US alone,
investment of two percent of Gross Domestic Product (GDP)—amounting to about $300 billion per
year—could, over a five-year period, create as many as 21 million jobs in a green economy, or 14%
of total employment. The construction and transport industry sectors would experience the greatest
number of added jobs.
However, the report continues, "Current business models in many
countries, based on competition over the lowest social and environmental standards, are not
creating jobs, nor are they protecting our planet."
While the commitment of governments to
allocating two percent of GDP to green investments would not in itself suffice to finance the
transition to a low-carbon economy, doing so would surely send a positive signal to institutional
investors. But as OECD noted in its report, a lack of appropriate investment vehicles has been one
impediment to more widespread private investment.
A step toward making such vehicles
available in the US was announced last week by the International Finance Corp (IFC). The first IFC green bond targeting US investors is
expected to raise $500 million to promote innovative energy-efficiency and renewable-energy
projects in emerging markets.
The lead arranger for the issue is JPMorgan. Institutional
investors that have signed on thus far include BlackRock, TIAA-CREF, and the California State
Teachers' Retirement System (CalSTRS).