Climate change and your pension pot - discover the link

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With all eyes on COP26, how are climate risks changing the way we save for the future? Sindhu Krishna, Head of Sustainable Investments, and Gareth Trainor, Head of Investment Solutions, discuss the link between climate change and the money invested in your pension pot.

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Sindhu, what’s the link between climate change and the money invested in pensions? 

A pension pot is essentially money invested in a wide variety of different companies across different industries, with the aim of generating returns over the long-term. 

The effects of climate change will have, and are having, a real world impact on how companies operate and perform. We’ve already seen the effects physical risks, such as forest fires and flooding, can have on people and businesses. 

As we move towards a low carbon economy, companies that fail to change how they operate will be left behind or become ‘stranded’. This is what’s known as ‘transition risk’. It can happen through lack of demand for products or services or support from investors, or through failing to adapt quickly enough to the changing regulatory landscape.

Meanwhile innovative companies, seeking to help solve the climate crisis, may perform better. 

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So pension providers need to consider both the risks and opportunities of climate change?

Yes, as a long-term investor we must consider both aspects for our investment portfolios, on behalf of our customers. 

We can’t ignore the potential impacts in the short, medium and long term from climate change on the world economy, the valuation of the companies we invest in, and therefore on our customers’ pensions and savings. 

Equally, we need to ensure that we pro-actively go after any opportunities that climate change presents to us as investors.

Carefully integrating environmental, social and governance (ESG) factors, such as climate change, is crucial to successful investing. It can help drive more sustainable outcomes, while also aiming to make investments more resilient and maintaining or even potentially improving returns. Although remember, this can never be guaranteed.

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Gareth, what are customers telling you about climate change and their pensions?

The level of risk and returns are still the top priorities for the majority of our customers. However most want to achieve the balance of a good return without harming society or the environment. These are the customer views that we continue to find in our ongoing responsible investment research. 

When it comes to responsible investment issues, climate change comes out as the most important for customers.  

Meanwhile 85% of respondents said they expect Standard Life to consider how responsible all their investments are – not just those labelled as responsible or environmental, social and governance (ESG). 

In short, our research is telling us that customers need us to deliver on their financial goals – but they also want reassurance that we’re doing this in a responsible way. 

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Sindhu, how can the money in our pension pots help to tackle climate change?

We can all use our pensions to help channel investments towards companies that support a lower carbon economy and by encouraging companies to act sustainably.

Choosing a pension provider that is committed to net-zero, as well as collaborating with industry peers, is integral to making a real world impact. 

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Can you explain a bit more, how is Standard Life doing this?

As part of the Phoenix Group, Standard Life is committed to net zero targets for our investment portfolios. We’ll reduce our carbon emissions by 25% by 2025; by at least 50% by 2030 and to net zero by 2050. 

This is about real change – not just reshuffling what we’re invested in. We’re increasing investment in companies with climate strategies and those coming up with solutions to help tackle climate change. These are the businesses and technologies needed to support decarbonisation in the real economy. As a last resort, we’ll also pull out our investment from those companies failing to meet our climate standards. 

Stewardship is incredibly important. It’s about encouraging the companies we invest in to reduce their climate impacts. The investment managers we work with talk to the companies they invest in to help drive positive change. 

We’re really excited about our Net Zero strategy. And from a wider perspective, it’s exciting to see energy behind the need to change. Actions and plans to transition to a low-carbon world – that’s what we’re looking for.

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And Gareth, which developments are you most excited about? 

Moving so many of our existing customers into sustainable solutions. As I’ve said earlier, our research shows that customers expect us to be investing responsibly regardless of the labelling. So to be making these changes en masse – with tens and potentially hundreds of billions of pounds – really makes me proud. 

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Sindhu, how do you see sustainability issues, such as climate change, changing investments over the next five to ten years?

We’re observing a shift in capital towards greener investments and away from those that are more exposed to risks of climate change and not showing progress in transitioning. I only see this increasing over the coming years. 

The industries that fail to adapt and keep up with transition requirements could end up becoming a smaller part of our society. They’ll be replaced by companies that are seeking to help solve the climate crisis, or at the very least not add to it. 

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Gareth what would you add to this?

I believe that we’ll see more companies starting to embrace the climate change agenda. It will become a ‘norm’. So people’s investments, including their pension, will be managed with this in mind – likely towards simple, easy to understand goals, such as the net zero targets many companies are setting; including Standard Life. 

I hope we also begin to see a greater commitment to address sustainability issues other than climate change. Issues such as diversity, or poor corporate governance, need to be considered if we’re to drive real change for the better.  

It’s pointless feeling good about a windfarm investment if the manufacturing of the turbines uses slave labour, production methods that pollute local rivers, and the lack of good corporate governance prevents engagement and positive change in this space. 

To me, the next five to ten years is critical in the evolution of how we tackle climate change. But it’s also critical in how we address the wider sustainability issues we all face. One way we can all do this is by choosing savings and pension solutions that consider these issues. 

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Find out more

You can read more about these topics in Gareth’s recent article Aim to grow your pension pot and do good – is it really possible? or his beginner's guide to responsible investing. 

Our Responsible Investment pages guide you through how we incorporate sustainability issues into our range of investment solutions. 

Standard Life is part of the Phoenix Group. You can read about their sustainability commitments here. 

The information here is based on our understanding in November 2021 and shouldn’t be regarded as financial advice.

The value of investments can go down as well as up and may be worth less than what was paid in.

Standard Life accepts no responsibility for information contained on external websites. This is for general information only