UK pension funds are in line to haemorrhage USD19 billion by in assets in the next 15 years thanks to exposure to fossil fuel companies, according to a new report from the UK Sustainable Investment and Finance Association (UKSIF) and Transition Risk Exeter (TREX).
The research finds that global economic exposure to fossil fuel asset stranding risk has doubled in the last five years and will amount to USD2.28trillion by 2040, with the UK disproportionately exposed with assets of USD141 billion.
Of that USD141 billion, UK pension funds account for 13 per cent leaving the retirement savings of millions of members at risk.
James Alexander, Chief Executive of UKSIF, called on asset owners to switch investments out of fossil fuel companies into clean energy alternatives.
“The surest way to offset the risk of losses posed by stranded assets is to invest in industries that will thrive as fossil fuels decline. The UK government must demonstrate global climate leadership by implementing ambitious decarbonisation policies and fostering investment in the growth industries of the future, like renewable energy.”
Alexander continues: “Together, the coordinated efforts of investors and policymakers can meaningfully mitigate stranded asset risk while also ensuring that the UK plays a leading role in the global green transition.”
Alexander also highlighted the need for wider shareholder engagement from investors, and suggested they extend stewardship activities to policymakers.
“Asset owners and managers should enhance not only their corporate engagement but also their engagement with wider actors, including governments, regulators and international standard-setting bodies, to help ensure a more enabling policy environment for net zero,” he said.
The UKSIF report follows warnings issued by Ortec Finance last November that North American pension fund returns could decline up to 50 per cent by 2040 “if the current approach to setting and governing climate policy doesn’t change”.
Doruk Onal, Climate Risk Specialist at Ortec Finance, said: “The decline in investment returns has serious implications. For pensioners, reduced returns could lead to lower retirement benefits and financial insecurity. Sponsors, including corporations and government bodies, might face increased contributions to cover shortfalls, impacting their financial health. Employees could also be affected by lower pension fund performance, leading to potential adjustments in retirement planning and expectations.”
Several UK pension funds including West Yorkshire Pension Fund (WYPF) and the Environment Agency Pension Fund have tasked consultancies with exploring the impact of stranded assets on their portfolios.
According to a document produced by LCP for WYPF, in a worst-case scenario, if the value of the oil, gas and coal holdings in the fund’s UK equity portfolio were to fall to zero, WYPF would lose about 2 per cent of the value of its overall invested assets.
While this would not lead the scheme to become underfunded, LCP notes that in a scenario where the UK oil, gas and coal holdings lose their value, “other parts of the portfolio may also lose value due to the underlying risk factors driving this loss”.
The UKSIF report notes that as some of the largest and longest-term investors in the economy, pension funds have long led the way in the incorporation of sustainability factors into their investment strategies.
“However, with some funds invested directly in fossil fuels and others exposed to the contagion of risk through knock-on impacts associated with stranding, the research shows that they are also significantly exposed to asset stranding risk.”
