Follow the Money: How Pension Fund Leaders Are Key to a Zero-Carbon Future

The money that underpins our dependence on high-carbon assets and puts lives and livelihoods at risk has many masters. One master is the deferred wages of working people, their pensions, used to undergird assets that emit dangerous levels of carbon pollution, causing climate change.
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To understand the complexities of our world, we're often told to follow the money and find a trail that can unlock a tangled web of interests.

The money that underpins our dependence on high-carbon assets and puts lives and livelihoods at risk has many masters.

One master is the deferred wages of working people, their pensions, used to undergird assets that emit dangerous levels of carbon pollution, causing climate change.

Assets that emit greenhouse gases are long-term-capital-intensive and need a 25- to 40-year earnings forecast to justify their current valuation, so any blip over the next 25 years could cause some degree of chaos and uncertainty for working people.

These are the typical long-term-capital-intensive investments that pension funds favor.

Acceleration to a zero-carbon economy is imminent.

Reduction of carbon and its replacement by cleaner alternatives could be in the next Chinese five-year plan, after near riots on the streets of Chinese cities over pollution. Innovation could simply price out high carbon. Or the divestment movement and the more level-headed risk groups such as Asset Owners Disclosure Project (AODP) may succeed in driving a capital shift among enough funds to tip the scales.

With so many different pathways to trigger the acceleration, the only variable is timing.

Yet future-proofing our pension investments in an orderly transition to a zero-carbon future doesn't seem to make it onto an investor's checklist. There are some key signs and opportunities this year that the risk of this chaos might actually be smoothed out.

The AODP recently released its 2015 Global Climate Index, showing what the big end of town is doing in this area. Some 85 percent of large funds have their heads in the sand, praying for their short-term-oriented fund managers to accurately assess a long-term risk.

What is notable is the acceleration of a few fund leaders who have clearly abandoned the markets, at least partially, as a way to protect long-term value against climate risk.

AODP's nine AAA-rated funds reads like a who's who of thought leadership on wise investments, and it can only be a matter of time before the rest realize the landscape of the future.

The forthcoming Chevron AGM on May 27 is an opportunity for wise investors to show their cards.

For the first time, long-term investors have an opportunity to start shifting the capital away from high carbon in order to reduce their long-term risk by ordering Chevron to put the money back into the retirement accounts of their end investors, hundreds of millions of ordinary people and workers.

The implications of an investor action against Chevron is huge and signals a major shift in thinking toward how to smooth the transition to an inevitable zero-carbon future.

In the coming months, investors supported by leading NGOs are likely to propose that large companies consider how to diversify themselves from within rather than wait for shareholders to battle for their money back in order to give it to some other company to fuel their low-carbon profits.

Companies changing from within should manage their transitions and give workers a seat at the table to limit jobs volatility and prevent whole sectors and communities from becoming ghost towns.

This just transition makes business sense. The only barrier to its success will be the intransigence of boards not willing to consider the transition investment over short-term returns, preferring instead to commit society to the inevitable volatility of a more sudden shift that will increase jobs losses and value destruction for pensioners.

Even committed oil and gas companies could start on this transition. With BP covering up their low-carbon research that would have sent them down this path in the 1990s, and with Exxon's climate statement last year removing their last ounce of credibility regarding a smooth transition, things will be difficult.

However, the tide in the opposite direction might be too big to fight, with the large asset owners deciding that rocking the boat is better than no action at all.

Fossil fuel companies should read these tea leaves and quickly produce business plans and models that survive a 2-degrees-warmer world, even if that means drastic diversification. Workers have a right to know how companies are planning a transition to a zero-carbon future.

The role of institutional investors, including workers' pension funds, in helping transition to a low-carbon economy and mitigating the impact of climate change is a central concern for unions.

This transition doesn't have to be disorderly.

The incentives for investors to push for a zero-carbon future are straightforward: It's about money and return on investment.

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