Pension Funds & Sustainability: It always comes with a sacrifice

Pension Funds & Sustainability: It always comes with a sacrifice

Pension funds, entrusted with managing the retirement savings of millions, are increasingly being called upon to incorporate sustainability considerations into their investment strategies. In an interview with Ludovic Phalippou, a professor in Financial Economics at the Said Business School, University of Oxford, we explore pension funds’ current approach to sustainability. Phalippou also is one of the lecturers in the program ‘Certified Pensioenexecutive Vermogensbeheer’ of the Erasmus University Rotterdam.

According to Phalippou, Dutch and Scandinavian pension funds have traditionally been vocal about sustainability, although the extent of their actions remains uncertain. In Asia, sustainability is not a prominent concern, while certain regions in the United States, like the East and West Coasts, show more emphasis on sustainability. However, due to potential backlash, sustainability remains a divisive issue in some areas of the United States, such as Texas. There are also emerging signs of sustainability gaining attention in the Middle East.

Attention to sustainability is mostly talk

In Europe, pension funds’ attention to sustainability is “mostly talk” according to Phalippou. “But at least, they are talking about it. Of course, pension funds say that they have tons of concrete examples, but for me, this seems mainly window dressing.” The professor explains why taking real concrete actions is so difficult: “Sustainable investments are often additional, meaning pension funds support projects that would not have otherwise happened. Such projects often lack a favorable risk-return profile.”

Phalippou: “It is tricky for pension funds to do investments with a bad risk-return profile. At the end of the day, they are playing with others’ money. You cannot go to a nurse, whose money it is, and say: ‘Look, we used your pension money for the preservation of forests in the Netherlands, so we are doing a good job for the environment, but sorry, the financial return is bad.” Moreover, pension funds have legally the fiduciary duty to deliver returns for their beneficiaries. Often, this is a hurdle for real sustainable investments of pension funds.

Divestment from Oil and Gas Companies

According to Phalippou, the actions that pension funds are currently undertaking are symbolic and not substantial. Phalippou refers among others to the decision of ABP to divest in oil and gas companies. “There is a lot of misunderstanding. Imagine that I have a stock of Royal Dutch Shell. When I sell it, someone buys it from me. The share doesn’t disappear and I’m not taking money out of Royal Dutch Sell. It’s only a transfer of ownership between me and a third party.” It’s even getting worse when many investors dump their shares. The professor: “If there are enough people who sell their stocks, the price will depress. This means that the people who buy the stocks are getting a bargain while they will get the same dividends. They are making some people richer at our expense without changing anything.”

What is the solution? The economist suggests focusing on primary transactions because “only then you can have a direct impact.” This means that lending practices and funding decisions of banks need to be changed. Phalippou: “Banks can have a direct impact when they are no longer lending to projects for oil or gas exploration. This is currently the case for tobacco companies. For them, it is hard to borrow any money from banks. Banks are still lending to oil and gas companies.”

Sustainability comes with sacrifices

According to Phalippou, the current sustainable actions of pension funds seem like greenwashing. The economist thinks this is harmful: “By allowing greenwashing, there is less room for people and companies who are taking substantial action.” Substantial action always comes with sacrifices. “In Oxford, there was a student protest. They urged the endowment committee to divest from oil and gas, but when the committee proposed to take concrete action by turning off the heating in all rooms, the students were less enthusiastic.” This example shows that changing behavior has a direct impact, but because it comes with a sacrifice, it is not really popular.

While the conversation around sustainability in pension funds is gaining momentum, especially in Europe and some parts of the United States, there is a need to bridge the gap between rhetoric and action. By stopping taking symbolic actions, pension funds can finally move beyond greenwashing. But impactful actions always come with sacrifices. The real question is how large the price is that we want to pay. Are we ready to accept investments with a worse risk-return profile?


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