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It’s fair to say that ‘pensions’ is not a word that gets people’s hearts racing. Indeed, not a word that people like to talk about much at all, but as the power of pensions to tackle climate change is becoming clearer, all that is beginning to change. With around £3 trillion invested in UK pension schemes, pensions can have a transformative effect on efforts to tackle climate change. As investors, pension schemes can support low carbon innovation, as risk managers they can mitigate climate risks, and as shareholders they can drive net zero across the whole economy

The impact could be enormous. Aviva research shows that switching to a green pension is 21 times more impactful in reducing carbon emissions than giving up flying, going vegetarian, and switching energy providers combined. That has some impact.

People are beginning to sit up and take notice. Interest in green pensions has increased markedly in recent years. With auto-enrolment driving ever more people to enjoy a workplace pension, this matters to an ever greater number of people.

It is little wonder. Climate change represents both a material risk and a huge opportunity for pension schemes.

Research Aviva commissioned with the Economist Intelligence Unit, estimated that climate change could wipe $43 trillion off the global economy – that is 30% of all the world’s manageable assets. With pension returns dependent upon the performance of the underlying investments, the hit to people’s pension pots could be enormous.

At the same time, climate change presents a huge investment opportunity for pension schemes. Mark Carney, former Governor of the Bank of England and now UN Special Advisor on Climate Action and Finance, described the net zero transition as “the greatest commercial opportunity of our age.”

Faced with such risks and opportunities, pension trustees have a responsibility to manage the financial impacts of climate change on behalf of pension savers. As one of the UK’s leading pensions providers, this is a key Aviva priority. We have announced a goal to reach net zero emissions by 2040. This is the most demanding target of any major insurance company in the world today. It means that all our auto-enrolment pension funds are on the path to net zero.

That we’re using our influence as shareholders to ensure that the firms we invest in target net zero too. For example, we are demanding that 30 of the largest emitting companies, responsible for approximately one third of global emissions, set demanding net zero targets with strong governance to deliver. If they do not demonstrate adequate progress, we will withdraw our funding.

Our target is certainly challenging, and we don’t yet have all the answers, but we believe it is the right thing to do.

However, if the UK is to meet its net zero target, others must act too.

To its credit, the UK Government has been instrumental in driving action on climate change. The Government’s amendments to the Pensions Schemes Bill last year – which require pension schemes to assess and report on their climate risks and opportunities – are hugely welcome and will lead to far greater understanding of climate change amongst trustees and beneficiaries. This was the first time that climate change had been included in a pensions-related bill and for that, the Government should be applauded.

At COP26 the Government went further, announcing that firms will be required to publish net zero transition plans. Again, this is hugely welcome and will help ensure that voluntary net zero targets translate into real world emissions cuts. It is vital that these transition plans are delivered without delay and that pension schemes are at the forefront of this journey.

Despite this, pensions remain a powerful, but under-recognised lever for change. Only a fraction of the £3 trillion invested in pension schemes is aligned to the UK’s net zero target. Pension schemes are still not fully harnessing their role as shareholders to press the companies they invest in to decarbonise. Pension savers themselves have a role to play too, by using their voice to demand that their pensions are invested sustainably.

We are faced with both climate and biodiversity crises that must be urgently tackled, but we mustn’t be daunted. The window is small but the opportunity is large. Pension funds must seize the opportunity. The future for millions of pension savers depends on it.

Frank Carson is the Director of UK Public Policy at Aviva. This article first appeared in our Centre Write magazine Favourable climate? Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Katt Yukawa]