Climate-Change Investing Forced on Retirement Savers

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A story from the U.K., but don’t think that something like this couldn’t happen here.

The Daily Telegraph’s Jessica Beard:

Trillions of pounds in pension funds will be shoehorned into “green” and “ethical” investments as the Government plans to employ savers’ hard-earned retirement money to “save the planet”.

However, higher fees, limited investment options and the potential for share price bubbles could hit the future value of pension pots, experts have warned.

Pension providers have started moving retirement pots without consultation. Paul Darrow, who works for the City watchdog, the Financial Conduct Authority, said he was “perturbed” that his pension was being transferred to carbon-free and “socially responsible” investments.

Mr Darrow, whose name has been changed, said: “I’m worried it has compromised the long-term growth of our pensions for a warm, fuzzy feeling in the managers’ bellies. The issues of the world cannot be solved by a pension or two, so why is mine part of this experiment?”

He said the political world had spilt over into the financial one and he was “disturbed” that his pension was targeting social change rather than flat-out growth.

“Socially responsible” investing (SRI) and the variant of SRI known as ESG (when companies are measured against environmental, social, and governance yardsticks) as well as the closely linked concept of “stakeholder capitalism” — where a company’s management owes a duty to a range of “stakeholders,” of whom shareholders are just one category — all involve a (partial) separation of the owners of their capital from the return that that capital should generate. If those owners have freely chosen to accept a lower return because of their beliefs (by, say, declining to put their money in funds that invest in fossil-fuel companies), that is, of course, fine. But if those owners are given no say in the matter, that is an entirely different matter.


Pension providers have moved money ahead of forthcoming rules enforced by [Britain’s Conservative] Government. From October, all pension schemes with more than £5bn [a limit that will fall to £1bn in October 2022] will have to assess what climate change means for their scheme and report on the climate risk of their investments.

Guy Opperman, the pensions minister, said: “We have put climate risk at the heart of pension decision-making. This will benefit savers, the jobs market and, crucially, the planet.” However, evidence that such moves will benefit savers is limited.

That a (Conservative) government believes that it is the job of the state to decide what should go “at the heart of pension decision-making” is a sad reflection of where, ideologically, Britain’s Tories now stand. It also says a lot that the minister given the job of selling this dismal exercise in central planning should be reduced to spinning tall tales about investor return, the jobs market, and “the planet.”

To believe that the British government’s largely uncosted, poorly thought-through and environmentally almost completely irrelevant plans for the U.K. to achieve net zero greenhouse gas emissions by 2050 will, on a, well, net basis, create jobs is to be truly gullible. That the Conservatives appear to believe that voters will believe this nonsense shows (not for the first time) their contempt for the electorate, but I digress.

On the question of return, Beard notes:

The top 10 most popular ethical funds held in personal pensions have returned less than the top 10 traditional funds over one, three and five years, data from Interactive Investor, the fund shop, showed, although this was skewed by the large returns generated by Scottish Mortgage investment trust and the Baillie Gifford American fund.

In addition, the most popular ethical funds, also known as socially responsible, “ESG” or sustainable, cost 0.3 percentage points more than traditional ones on average. This could push up how much investors pay. Results have always been mixed. Such funds returned nearly twice as much as traditional funds last year, with an average return of 10pc against 5.3pc, figures from Morningstar, a data provider, showed. Traditional funds have grown more in 2021, however.

Dzmitry Lipski of Interactive Investor said: “Funds with strong environmental and social standards can do better, but investors must scratch under the surface before getting carried away. Some, for example, might simply have avoided oil stocks when they fell last year.”

Lipski’s is an important point. Equally, not a few of the outperforming stocks in companies with a high ESG rating owe that performance to factors that have little or nothing to do with the “E” or the “S” (the “G” — governance — could, for obvious reasons, be a different matter).  For example, a good number of the tech companies that did so well for investors last year had a decent ESG rating (in no small part because of their light environmental footprint), but that was not why their stocks ran up.

The question of return is (for beyond the obvious reasons) central to those pushing ESG, who like to argue that investors can do well by doing good. Again, if we put the “G” to one side, there is no particular reason why the “E” and “S” should enhance performance (or, another claim, reduce risk), except perhaps in one particular case. If investors are buying ESG stocks because other investors are buying ESG stocks, the sheer weight of cash inflows can lead to outperformance. The flaw? That outperformance bears no relationship to the qualities inherent in ESG, but quite a bit to those of a bubble.


There is also a risk that so much money being forced into ESG or sustainable stocks will inflate the value of their shares. DIY investors and wealth managers added £12bn to ethical funds last year, according to the Investment Association, a trade body. John Teahan of RWC Partners, a fund manager, said this enormous flow of money had driven stock prices to extremes and future returns could be poor.

Imperfect it may be, but the market has a way of bursting bubbles in the end. Equally, if there is a fundamentals-based reason why a company’s high “E” and “S” score is value-enhancing, then that will also tend to become priced into its share price over time. Valuation is not a precise science — far from it — but the more attractive a company’s prospects are seen to be, the more “expensive” it will become, thus reducing (although certainly not eliminating) the chances of future outperformance. The other side of that equation is that if the prices of certain stocks are depressed by their failure to satisfy the ESG enforcers, that could well represent a buying opportunity.

Beard concludes:

A spokesman for the FCA said the watchdog believed the risks associated with climate change should be taken into account to protect pension outcomes but savers had been given alternatives to the default fund.

That may be the case, but take a look at the regime that is being put in place and then ask yourself how alternative (when it comes to ESG) those alternatives are really going to be.

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