“Pension funds of the world unite” doesn’t have quite the same ring as Karl Marx’s call on workers of the world to unite had. But it’s a powerful call given the potential of pension funds to move the needle on climate finance and in other areas of investment.
Recent developments point to a growing realisation that without the full support of pension and sovereign wealth funds, the colossal financing challenges facing the world cannot be met.
The UK is among the front runners in moving to consolidate its public pension funds so that they can play a bigger role in capital investment, following earlier moves by Australia and Canada to create pension “super funds”.
These initiatives seem likely to be followed by counterparts elsewhere as the size of demand for financing – not least in averting or mitigating the impact of climate change – becomes clear.
“The amount of capital investment required to transition to a sustainable economy is estimated to be as high as US$5 trillion per year,” the Official Monetary and Financial Institutions Forum or OMFIF, an independent forum for central banking, economic policy and public investment, noted in a recent paper.
It noted that with their long-term horizons, vast capital and market influence, public pension and sovereign wealth funds are increasingly at the forefront of transition finance, and their “potential to drive the capital needed to hit net zero cannot be overstated”.
Pension fund assets in the Organisation for Economic Cooperation and Development nations stood at $53 trillion at the end of 2023. And the World Economic Forum puts the total size of sovereign wealth funds worldwide last year at $11.3 trillion.
Transition finance
The key issue is transition finance. The belief that climate change is a problem chiefly of developing nations or of dealing with the impact of forest fires, floods, typhoons and the like needs to take account of a wider reality, which is that the so-called brown revolution is going to cost vast amounts of money.
The term is shorthand for describing the conversion of high carbon-emitting industrial installations and power plants, among other things, into green facilities that do not threaten humanity and the planet.
The projected total cost is the subject of much speculation but Sarah Breeden, then deputy governor of the Bank of England, said in a speech in 2019 that the investment needs to finance this transition are an estimated $90 trillion – almost five times US gross domestic product – by 2030.
Unfortunately, this number has become obscured in the public mind by the much smaller amounts that economically advanced nations have pledged to offer developing nations by way of climate change aid.
At the 2009 United Nations climate change conference or COP15, advanced economies pledged $100 billion annually by 2020 in climate aid to developing economies. This was tripled to $300 billion a year at the recent COP29 meeting this year, but it’s still small beer compared with global needs.
It’s not only climate change. Other critical areas of socioeconomic development such as infrastructure and healthcare will require quantum amounts of investment beyond the power of taxpayers or governments to bear. Hence the need to tap pension and sovereign wealth funds.
