• brendon.james

Climate Change and Financial Markets: Where did our Pension plan go????

I don’t want to make this article too nerdy, but it is critical that we engage in this conversation. The focus on climate change has been the impact on natural systems and human life as we know it and rightfully so. There are other impacts that Climate change can have that may not be obvious at first glance, but it is intuitive for us who think deeply about these issues.

It has been well documented that Climate change can have an adverse impact on the financial sector. In an interview with The Guardian, Governor of the Central Bank of England, Mike Carney, when asked about the impact of Climate change said, “Companies who do not adjust will go bankrupt undoubtedly”; the interviewer also states that “The Bank of England has said up to $20tn (£16tn) of assets could be wiped out if the climate emergency is not addressed effectively. However, Carney also said, “Great fortunes could be made by those working to end greenhouse gas emissions with a big potential upside for the UK economy in particular” The Guardian (2019). For those who do not follow the finance industry, these are extremely significant statements. Central Bank-ers are always measured in their public utterances. A wrong quote can put markets in a downward spiral and erode billions of dollars in capital if confidence in the market is shaken. Reading this interview and seeing what was said by the second-largest Central Bank on the planet should peak our interest and lead us to question his assumptions.

One of the areas that Mr. Carney was concerned about is the fall in the real value of asset prices. According to Investopedia, “an asset is anything of value or a resource of value that can be converted into cash” Folger (2019). We invest in assets. Governments, companies, financial institutions, and pension plans all invest in assets. A closer look at pension plans would reveal that a great deal of social fall out can occur if these plans were to fail. Pension plans manage a portfolio of assets that are backed by areas such as the industrial manufacturing sector, oil and gas exploration and production, and real estate. Each one of these sectors can become “stranded assets” because of the impact of climate change.

Reducing global carbon emissions to meet the UNFCCC goal of limiting climate warming to 2°C above pre-industrial global average temperatures requires keeping significant fossil fuel reserves in the ground – or at the very least they cannot be burned without carbon capture and storage. This will impact the cash flows, future values and share prices of companies whose businesses rely on the extraction and consumption of fossil fuels. These fossil fuel assets may effectively become “stranded” (Matikainen 2016). The International Energy Agency estimates that over $1trillion oil and natural gas assets could be abandoned by 2050 (Ambrose 2017). It must be understood that Pension plans that invest their funds into these assets with the expectation of future growth can experience diminishing returns and they may not be able to meet their commitments. We are those commitments. All of us and our children who invest in pension plans, mutual funds and 401K’s are at risk. The question is how much of our pension plan portfolios are invested in oil and gas assets and how much risk are we exposed to? Some may think this is a radical position and these assets will not be stranded because the world will always need oil and gas. Let’s say this scenario is true. The challenge might not be the elimination of demand but a reduction of demand, or best-case scenario, a flattening of the demand curve all of which can happen with the electrification of transport, residential heating and decarbonization of the Power and Utility industry. This scenario can translate to a reduction in returns for Pension Fund managers. The risk is not eliminated in this scenario of the future which is the best-case position.

Another area of possible stranded assets is in real estate. We just need to think back to 2008 and the global financial crisis caused by the housing bubble to understand the importance of real estate to the economy. The world’s most expensive and valuable real estate assets exist on the coasts of developed countries. Miami and the Gulf Coast and the Eastern side of the United States is a great example (New York, New Jersey etc). Flooding and hurricanes are having a tremendous impact on the value and insurance cost of these cities and states. If these storms persist and flooding becomes worse these investments may become stranded. Currently Miami and Charleston are currently battling sea level rise in areas that has some of the world’s most expensive real estate - see the image below

Sunny Day Flooding in Miami. Loria (2018) Business Insider

Again, the question is how much of the pension plans under management has, as part of its portfolio, invested in real estate in coastal cities and towns? This must extend to not just direct investment in projects but even the investment in other funds and financial instruments that may be backed by real estate investment. Fund managers must look at their entire portfolio to see how exposed they are. The Canadian Institute of Actuaries as a group has already begun to ring the alarm and their members have already begun to see the impact of climate change to their investments in the insurance business and their pension plans. Organisations such as the Ontario Teachers Pension Plan in 2018 delivered a climate change report to their members on the health of their investment, their exposures and their long-term plan to divest their “risky” investments. (Canadian Institute of Actuaries 2019).

Fund managers must investigate and evaluate their exposure level to Climate Change risks and most importantly disclose these risks to their stakeholders. Then a plan of action must be developed to mitigate the risk and uncertainty. But all is not lost. As Mr. Carney (Governor of the Bank of England) stated, there is opportunity here as well for Pension Funds to be part of the transition in reducing climate change impacts through how it invests its funds, because there is a lot of money to be made based on the upside of this risk (investments in sustainable energy technology).

Capital markets have already started to respond to the crisis and there are many possible solutions available to Pension plan fund managers

Climate/Green Bonds- These are financial instruments that have their income stream related to a climate change solution or other projects with an environmental benefit (e.g. infrastructure investment, clean energy development, green innovation, and sustainable business models). They can be issued by governments, multi-nationals, corporations or pension funds. Most climate bonds have ring-fenced proceeds or are asset-backed which is great for those concerned about risk. This form of investment has shown large growth over the past few years, reaching a record $150bn new bonds issued in 2017. (Story et al 2019)

Catastrophe Bonds- Catastrophe bonds are financial instruments that transfer a specified set of risks linked to a catastrophic event to investors. The bondholder receives a coupon payment from the bond issuer, with the principal payment under the bond lost in the event of a catastrophic event and the money instead used to remediate the damage. For example, in 2017 the World Bank issued a catastrophe bond to Mexico to protect the country against losses of $360m in the event of a natural disaster (Christie 2017)

Impact Investing and Sustainability Indices- A more general option is to evolve the understanding of investment to consider not only its financial risk and return but also its social and environmental impact. “Impact”, although there is a sub-sector of impact investing that seeks to invest in entities whose activities have a positive impact on climate change. Impact is an increasingly important area for investors (Seekings 2018). To support this type of investment it is critical that investors like pension plan fund managers leverage their position to get companies to adopt better KPI’s. Numerous global indices have been created which include or weight companies based on their ESG (Environment, Social and Governance) practices, e.g. FTSE4Good, FTSE Climate Balanced Factor Index, FTSE/JSE Responsible Investment Index. Although not all of these are specifically climate-related, the climatic impact is invariably a significant factor in the environmental component of the index weighting. These indices can help investors identify sustainable companies and benchmark the performance of investment portfolios (FTSE Russel 2019).

So, Pension plans can use these tactics to reduce the climate risk of their portfolios and preserve capital values of their funds for the future.


Brendon James,

BA Geography, MBA Occupational Health and Safety, MSc Process Safety Management, MBA Sustainable Energy Management

LinkedIn: https://www.linkedin.com/in/brendon-james-94332a18/

"I am a lover of Economics, Energy, Stoic Philosophy, Crix and Milo in that order."


· Ambrose, Jillian. 2017. “IEA warns $1.3 trillion of oil and gas could be left stranded,” The Telegraph, 20 March, 2017, https://www.telegraph.co.uk/business/2017/03/20/iea-warns-13-trillion-oil-gas-could-left-stranded/

· Christie, Sophie. 2017 “World Bank Group issues the world's largest ever 'catastrophe bond' to Mexico,” The Telegraph, 8 August, 2017, https://www.telegraph.co.uk/business/2017/08/08/worlds-largest-ever-catastrophe-bond-issued-mexico/.

· Folger, Jean. 2019. “What is an Asset?”. Accessed 4th November 2019. https://www.investopedia.com/ask/answers/12/what-is-an-asset.asp

· FTSE Russel. 2019. ESG Ratings. Accessed 5th November 2019. https://www.ftserussell.com/data/sustainability-and-esg-data/esg-ratings

· Loria, Kevin. 2018. “Cities around the US are flooding at high tide and on sunny days at record rates — here's what it's like”. Accessed 4th November 2019. https://www.businessinsider.com/sea-level-rise-high-tides-sunny-day-flooding-coastal-cities-2018-4

· The Guardian. 2019. “Firms ignoring climate crisis will go bankrupt, says Mark Carney”. The Guardian.

· Matikainen, Sini. 2016. “What are stranded assets?” London School of Economics, 23 August 2016, http://www.lse.ac.uk/GranthamInstitute/faqs/what-are-stranded-assets/

· Seekings, Chris. 2018, “One-third of investors deem social impact just as important as returns”, The Actuary, 9 February, 2018, http://www.theactuary.com/news/2018/02/one-third-of-investors-deem-social-impact-just-as-important-as-returns/

· Story, Carol, Andrew MacFarlane, Jeremy Spira, Mahidhara Davangere, Mariette Thulliez, Namrata Bagree, Richard Hughes and Stephen Watt. 2019. “Climate Change for Actuaries: An Introduction”. Institute and Faculty of Actuaries. Accessed 5th October 2019. https://www.actuaries.org.uk/system/files/field/document/Climate%20change%20report%20250319.pdf

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