Climate change activism and trustee awareness of ESG has led schemes to divest from fossil fuels, figures released today show.
Clean energy investor Octopus Renewables revealed that institutional investors are set to almost triple divestment from fossil fuels in the next decade, with pension funds expected to divest 11.9 per cent of their portfolios away from fossil fuels.
The report includes 100 respondents from the UK, Europe, the Middle East and Africa, Asia and the US and pools from a spectrum of institutional investor organisations with an estimated total of $5.9tn (£4.7tn) assets under management.
From our perspective as trustees, we want to be saying we’re doing the best we can
Vassos Vassou, Dalriada Trustees
Octopus Renewables co-head Alex Brierley said: “Transitioning to a renewable energy future is challenging, but vital, and we still need to make bolder commitments on this front. Institutional investors can play a critical role in reaching this global goal by galvanising capital towards renewable energy infrastructure.”
The pensions industry plans to increase allocations to renewable energy to 6.9 per cent over the 10-year period, with more than half of the respondents citing the negative impact of climate change on investee company performance as the key driver for changing their investment strategies.
Investors focused on downside risk
Increased public concern over climate change and high-profile campaigning by Extinction Rebellion and Greta Thunberg were instrumental in spurring global institutions into action, prompting 52 per cent of UK investors to reconsider their portfolios.
Yet only 9 per cent of pension funds who divested or plan to divest from assets that negatively impact climate change plan to reinvest into assets that have a positive impact, compared with 19 per cent of global institutional investors.
Octopus Renewables co-head Matt Setchell said: “It’s disappointing that the proportion of capital divested from these assets and reinvested into climate-saving causes such as renewables and clean tech isn’t higher.”
Almost half of the respondents cited energy price uncertainties as a barrier to investment, more than a third blamed a lack of renewable energy investment skills, and more than a fifth cited liquidity issues.
Judith Fish, a professional trustee at Dalriada, noted that some sustainable infrastructure is long-dated, presenting another barrier to investment for defined benefit schemes with short time horizons – for example, those planning to buy out in the next five years.
We need to talk about green index fees
But Dalriada’s senior trustee representative Vassos Vassou highlighted that sustainability in both the investment industry and society as a whole is increasing, adding that many trustees have thought about environmental issues as part of their normal working day life.
“What I've noticed in my meetings is that other trustees get quite excited around ESG, even though they’re not excited about everything else that we do in pensions,” Mr Vassou said.
“From our perspective as trustees, we want to be saying we’re doing the best we can.”
Dalriada is working with platform providers to help smaller schemes using pooled and passive funds to switch to ESG-tilted alternatives, better reflecting the beliefs they are outlining in their new statements of investment principles.
However, costs are a problem with these new funds, with Mr Vassou saying managers charge multiples of the fee for a standard tracker fund to go green.
“I just question why they couldn’t just flip everybody from that fund [into the sustainable one],” he said.
“[Managers] sort of said ‘well because we have to do more’, but you don’t have to do two and a half times more.”
Craig Brown, institutional distribution director at platform Mobius Life, agreed that costs can be prohibitive.
Mobius added Legal & General's Future World Funds to its platform in 2017 and is considering adding more in the coming months. He said that currently invested assets in these strategies are low, with the time gap between first adopters and the res of the market perhaps longer than most commentators expect.
"Clients are increasingly cost sensitive and could well shy away from strategies on cost grounds," he said. "However, reasonably priced strategies with the key index providers should get traction in the coming months and years."
