How can pension portfolios protect against the climate crisis?

Earth Capital's Gordon Power highlights what pension fund managers can learn from covid-19 crisis

The covid-19 global shock has demonstrated the importance of resilience amongst pension portfolios

Without it, people’s hard-earned savings are susceptible to be hit. The big question facing pension fund managers is how resilience can be incorporated into portfolios, ahead of the next global crisis. The biggest lesson is right in front of us and can be found in the covid-19 pandemic.

Despite the media spotlight on impact and ESG funds, pension trustees have been slow in incorporating sustainable investment strategies into the traditional investment processes. However, the covid-19 shock has provided a wakeup call for fund managers, pension consultants and trustees, and scepticism toward ESG investment performance is beginning to fade.

Why? Because those pension funds that have invested sustainably have seen a degree of resilience over recent weeks. There’s clear evidence that sustainable businesses, particularly those linked to essential services and sustainable technology, have seen stronger resilience to the shocks in other parts of the market. This is further evidenced by the latest MSCI figures that show that over 60% of ethical and ESG investment funds have outperformed the wider global stock index during this market downturn.

Shedding a light on why ESG funds have outperformed their counterparts is revealing. First, ESG fund managers are likely to favour companies that drive positive social change in the future. Often companies driving change are technological. It is no surprise therefore that ESG investors have benefited from the performance in investments in energy efficiency, agriculture and renewable energy security in the last few months and over the longer term.  

Second, ESG measurement tools favour better run and higher-quality companies. These are normally characterised by good governance, and strong leadership. Those companies managed by leaders who know their supply chains, understand their employees and business structures can adapt rapidly to changing circumstances, like a global pandemic. The covid-19 crisis has therefore provided a filter, showing which companies can mitigate risk, and which are susceptible to risk.

Pension fund managers should learn from this and ensure that we seek a recovery linked to sustainability, not a recovery at any cost. Pension schemes should consider investment strategies in recovering from covid-19 that do not mask the planet’s biggest tail risk: the impending climate emergency. This systemic risk has not gone away and the effects of climate change pose a significantly great long term risk to economies and our well being if we do not ensure they are sustainable.

This crisis has made clear that impact investing leads to strong returns over the long run. And since it is, after all, a fund manager’s goal to improve return on investment, a failure to recognise the value of a sustainable approach means missing a huge opportunity. Put simply, ignoring the scientific evidence and continuing to adopt old investment methods is bad investing.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...