Viewpoint: What’s a pension fund to do? Climate change action is failing

It was a telling sign. The organisation responsible for the COP series of meetings, the United Nations, concluded in a press release of 26 October 2022 that after over four decades of global climate policy bargaining and close to 30 COP meetings, “climate plans remain insufficient”.

The curve is bending, but it is too little, too late. That press release was followed by COP 27 in Sharm el-Sheikh that was widely regarded as disappointing.

The financial sector, while talking the talk, is not doing better. Recent research showed that around two in three respondents in financial organisations did not believe their own climate promises could be kept in time.

At a time like this, it is useful to cut through short-term developments, whether COVID-19 or the Russian war in Ukraine, and low effect side shows and concentrate on the core issues.

Crudely put, climate change is about the energy and agricultural transitions. Over 70% of CO₂ emissions come from energy use, over 20% from agriculture, forestry, fishing, land use and energy used in those sectors.

The energy sector is relatively uncomplicated. Supply is dominated by a limited number of enterprises, British Petroleum (formerly the Anglo-Persian Oil Company), Gulf Oil, Standard Oil of California (SoCal), Chevron (formerly Texaco); Royal Dutch Shell; Standard Oil of New Jersey (Esso) and ExxonMobil (formerly Standard Oil Company of New York).

Low or no CO₂ alternatives are available: water, wind and solar energy with nuclear and natural gas as transitional solutions. In a technical sense, it is a problem of installing generating capacity and distribution networks, which requires a great gob of money.

The money is there, with institutional investors, if the projects are profitable. Profitability is to a large extent a product of legislation. Legislation is staying behind.

Observers point at the “energy lobby”, in particular the American Petroleum Institute (API), a well-financed, lobby club of the major oil producers out to give pushback to climate change action and a major source of climate denial.

The budget of API alone is estimated at 27 times that of all pro-climate action groups together. It doesn’t help that pro-climate change group actions are very often perceived as ungracious, hostile (inviting counter-hostility) and obnoxious, distracting from their message and purpose.

Shell (UK-Netherlands) left API in 2019, citing “misalignments” of position. Total (France) followed in 2021, making API even more US-centred than before. Like the National Rifle Organisation, API is against any form of efficient government intervention in their sector, no matter the consequences.

The agricultural sector boasts a very different organisation: enormous amounts of small and medium enterprises, where even the largest agri-chains are minuscule compared to a single big oil producer.

Moreover, in particular small farmers are quite nature-aware. The problem is that there are few alternative production methods. Many marginal farmers would have to look for another source of income, many others are asked to make major investments. The solution is subsidising the survivors for the duration of the transition.

Apart from budget considerations, another issue is the distribution of the financial pain. This is clear from examples such as the French yellow vests or the Dutch nitrogen protesters.

Neither had a problem with fighting climate change, both claimed their members were asked to suffer more than their share of the pain. Both were met with a barrage of technical arguments that were irrelevant to them.

So what’s a pension fund to do? In most, if not all countries, pension funds have a national lobby organisation. These organisations are different in each country, so my recipe is global and lacking in detail, but the professionals in these organisations are well placed to add those details.

These organisations should be instructed to engage with their government with an obvious deal on the energy transition: you neutralise API and come up with the needed legislation, including effective carbon pricing and we come up with money for profitable projects. Let’s keep in touch.

The problem of the distribution of pain is more complicated. Perhaps a pension fund for the agricultural sector could engage directly, but the others could support research in new alternatives and gently nudge their government in the right direction.

Peter Kraneveld is an international pensions adviser at Prime BV