03 Sep Ethical finance holds great potential for a green recovery
Industry analysts believe pension funds are well-positioned to provide ethical finance and support the transition towards a decarbonised economy.
Covid-19 created many challenges and continues to influence major changes in our society. As governments across the world commence the development of new policies to rebuild our economy, we need to remember and maintain a clear long term vision that will provide added resilience and security for everyone. In regards to the environment, the necessity for a green recovery is critical in terms of us reaching our net-zero targets for the future. The targets are undeniably a significant challenge, particularly within our current situation and the added focus on public health and economic redevelopment. What Covid-19 has clearly shown is how society can adjust and innovate when it is necessary.
For our nation and others to reach net-zero by the intended dates, we will have to ensure an economic recovery focuses on the green industry. This will require unprecedented investment to ensure these targets become more realistic. Studies by the Committee on Climate Change suggest that investment into the UK power industry needs to increase from current figures of £10 billion to £20 billion each year to reach our goal. Aside from the energy industry, green investment is required across the entire economy to manage the impacts of Covid-19 and climate change together.
Some investment will likely come from government funds but due to the recent measures taken to alleviate the short term impacts of the pandemic, funds have been largely depleted. Based on the scale of the net-zero transition, the private sector will play a pivotal role in supporting this change.
Right now, many companies are considering ways of adapting their business to yield the potential benefits associated with a green recovery, but they need to be assured that investors are supporting them for the long run and are serious about a green recovery.
Whichever sector it may be, pension funds are well-positioned to support the challenges linked to delivering ethical finance and supporting a wider green recovery. This is down to several reasons:
Pensions Funds have the capital – due to automatic enrolling, more and more people are saving for their retirement and studies suggest that by 2018 the total value of the UK pension wealth exceeded £6 trillion. A green recovery provides a variety of sustainable investment opportunities, including green bonds.
Demand for Sustainable Investment is rising – A higher level of people are demanding more change and the new disclosure requirements mean pension funds need to clearly show how environmental, social and governance (ESG) factors are applied in their investment plans. Some large scales campaigns have resulted in various investment changes at some of the biggest pension funds, and pressure on funds is likely to build with raising public awareness of impact investing and fossil fuel divestment plans.
Green investment is a better business – More studies are indicating that the businesses focusing on ESG factors are outperforming their competitors in the long term. Placing a priority on being environmentally sustainable and socially responsible reduces risk to a business and improves overall revenues.
While there are several opportunities associated with pensions funds, more plans need to be made to ensure these are converted into clear actions. For one, pension scheme representatives need to collaborate and develop a more sophisticated reporting system to ensure they understand the ESG related impact of investments. Automatic enrolment providers need to align closer with environmental factors and ensure pension savers are provided with clear information on ESG activities. Furthermore, the UK Government and Pensions Regulator can provide added support towards pensions schemes and their green recovery plans for the future.
Aside from pension funds, a green recovery will require businesses having availability to additional capital and short-term financing options. The financial crisis of 2008 resulted in some changes and lack of support towards any ESG-related factors. Improvements in regulation checks in terms of social responsibility and sustainability means the banking industry is in a stronger position to support green recovery financing plans more ethically. For example, the launch of ESG ratings informing lending decisions is emerging and other initiatives are already been launched to improve the bank’s rate of transition towards a post-COVID green economy.
On a larger scale, the United Nations Environment Programme Finance Initiative (UNEP IF) is working on plans for the Principles for Responsible Banking to enhance lending that specifically supports ESG related activities. While reforming our economic system to achieve net-zero targets is a challenge, policymakers need to be confident and ensure that ethical finance plays an important role in supporting a green recovery.