The amount of money that is managed by pension funds is huge. Since pension funds have large amounts of money which they can use to invest in the market, they are known for being trendsetters in the investment community. It is for this reason that pension funds are being used by governments all over the world to promote the idea of green investments. The contribution of pension funds towards promoting green investments is quite huge.
In this article, we will have a closer look at how pension funds help in promoting the concept of green investments.
- Huge Impact: For a long period of time, it was thought that pension funds could only have a limited impact on the environment. It was believed that the greening of pension funds was largely cosmetic and did not make much of a difference to the actual cause. However, there have been many studies conducted in the recent past that have refuted this claim. These studies have also provided some heuristic measures to help estimate the impact that pension funds have on the environment.
Studies claim that if $100000 is invested in clean investments, then the environmental benefit is equal to taking four cars off the road! Since pension funds control trillions of dollars, the impact that their clean investments have on the overall environment is commendable.
- Long Time Horizon: Green investments have a typical cash flow cycle. Clean investment opportunities require a significant amount of cash to be invested upfront. Later, there is a huge gestation period and after that, the investment starts paying returns. This cash flow cycle is not acceptable to a lot of investors because they cannot keep their money locked in for so long. On the other hand, pension funds have no such issues. Pension funds are generally looking for long-term investments. Hence, the large gestation period is not a deal-breaker for them.
- Higher Returns in the Long Run: Another myth related to green investing is that the returns offered by such investing are less than the ones offered by regular investments. Pension funds do have a duty towards the environment. However, they are the safe-keepers of the retirement funds of millions of people. Hence, they have a fiduciary duty to do what is financially in the best interest of their investors.
It was believed that the environmental and financial duties of pension funds were conflicting with each other. However, recent data has shown that this is not the case. There is no significant difference between both types of investments. In fact, clean investments have outperformed other investments by a significant margin in the past decade.
- Directly Impacted by Global Warming: Pension funds invest over very long periods of time. A typical pension fund investor has an investment horizon of four or five decades. Four or five decades is a long period of time. This is the amount of time in which the effects of greenhouse gases and climate change will actually start having an impact on the overall environment.
Hence, pension fund investors are bound to be impacted by climate change. It is in their best interest to invest in green bonds and ensure that pension funds all over the world continue to invest in a sustainable way. The long-term nature of pension investments makes it the most impacted.
- Regulatory Pressures: Pension funds all over the world are closely regulated. This means that various government organizations exert influence over the way money in pension funds is invested. Now, governments have started exerting their influence to get pension funds to invest in green funds. They have started offering subsidies to pension funds that choose to invest in such instruments.
Governments are also permitting pension funds to invest in early-stage green tech companies. As a result, pension funds are able to obtain a higher rate of return which helps their cash flows. The funds received from carbon trading also tend to have a positive impact on the portfolio of pension funds.
- Sends Signals: The main idea behind encouraging pension funds to invest heavily in clean investments is to send a message to other companies. When companies who are in the fossil fuel business or other such polluting businesses, see the visible change in investor behavior, they are compelled to make changes to their business model.
Governments have realized that if they want to reinforce the trend of clean investing, they need to influence the actions of the vital few instead of focusing their efforts on the trivial many. Shifting large-scale investments outside of fossil fuel-related businesses is the clearest way to send a message to the overall business community that the future is going to be green.
The bottom line is that pension funds are playing an important part in channelizing money toward a cleaner and greener future. Pension funds have also helped create awareness amongst individual investors. Studies have shown that more than 50% of all individual investors who invest in pension funds want their pension to be green. It is likely that this number will grow even more in the future.
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