Why Pension Funds Should Embrace Green Disruption
by Arne Alsin
Six years ago, Mats Andersson, the overseer of one of Sweden’s largest pension funds, made a gutsy investment decision: He initiated a “massive purge” of polluters from his fund’s $40 billion portfolio. That meant no more coal and gas operators. And no more companies with excessive carbon emissions. Andersson’s pension fund, AP4, was officially out of the dirty energy business: By the end of the purge, more than half of AP4’s portfolio was redistributed.
One might be tempted to think that Andersson’s decarbonization efforts were driven by some sort of moral or ethical obligation to work towards a cleaner planet. Perhaps, but Andersson himself had a simpler rationale for the purge: “We did it because we want to get better returns.”
He added, “There’s a misconception that there’s a conflict between sustainability and long-term investing. We believe it’s a return enhancer.”
I share Andersson’s philosophy—and I hope more pension funds and long-term investors follow suit. At Worm Capital, our end goal is always performance for our clients, which is why we are so philosophically and strategically committed to the investment in sustainable companies that will continue to grow and thrive into the future.
Let’s take a step back. It’s 2018. We believe the existential risk of climate change is obvious. If we continue to poison our atmosphere with fossil fuels, we could suffer immense, irreconcilable consequences. Thankfully, stabilization is possible. Researchers at Princeton, for instance, have found that to avoid “dramatic climate change”—and avert a global climate catastrophe—“the world must avoid emitting about 200 billion tons of carbon” over the next 50 years.
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This is possible. Momentum has been building—and a surge of innovation in renewable energy technology will lead to a fundamental disruption and redistribution of energy markets. In the United States, solar and wind energy account for 15% of all electricity generation as of 2017, according to the U.S Energy Information Association.
Even more remarkable achievements have been made abroad. In Norway, 98% of all electricity comes from renewable sources, especially hydropower. According to IRENA, the European Union will likely boost its share of renewables to 34% of its energy mix by 2030. Sweden is on target to run entirely on renewable energy by 2040. Here in the United States, the Union of Concerned Scientists say that renewable energy can provide 80% of electricity by 2050.
Over the next several years and decades, we are likely to see the building out of entirely new systems: The transformation from combustion engines to electric vehicles. The shift from fossil fuels to solar, wind, and battery power. This shift will impact every company, from smartphone makers to cloud storage companies. As investors, this is a once-in-a-lifetime level of disruption—and it’s incredibly exciting. We’re ripping out the old and replacing it with the new.
In a more practical sense, we believe renewable energies will yield far better investing results.
Similar dynamics in other verticals prove that amidst disruption, it’s a bad idea to own the incumbents. The “old guard” will play protect-and-defend, but won’t contribute much in the way of innovation or radical change. And ultimately, the end markets for their products (e.g. the market for lumbering, gas-guzzling car) will simply decline and eventually be phased out for better alternatives (e.g. the market for efficient, electric vehicles with incredible acceleration).
For pension funds and other long-term investors who think in terms of years and decades—not weeks and months—it’s critical to align now with disruptive movements that will fundamentally reshape the world we live in over the next 20, 50, and 100 years. Economic growth is driven by disruption, and we are in the process of replacing dirty energy production with all-new, clean energy. Naturally, this is a process that will take an enormous amount of capital and labor, and there will certainly be casualties. But we are heading towards a renewable energy future—and long-term investors must get on board.
Thankfully, we’re starting to see some future-minded pension overseers make this leap. Scott Stringer, the New York City Comptroller, announced last April he was launching the city’s “first-ever” search for investment managers with low-carbon and sustainable indexes. “Climate change is real, the science is real, and the threat to both our planet and the global economy is real,” Stringer said. “This isn’t just about doing the right thing by the planet. When we invest in companies that recognize the irrefutable realities of global warming, we’re making smart investment decisions and boosting returns.”
We applaud Stringer’s decision—and we expect many more to follow suit.
To be clear: The renewable energy revolution is already underway—and this revolution is happening faster than you might believe. The EIA, for instance, projects the share of renewable energy in the world's electricity mix to rise from about 24 percent in 2016 to 29 percent by 2022. “By that year,” Bloomberg reports, “renewable energy output is expected to be bigger than the entire electricity consumption of China, India and Germany combined.” By going 100% green, a pension fund is merely stepping on a train that’s already left the station.
Clean energy is a long-term solution, and pensions have long-term liabilities. These are payouts that will be due several decades from now, so a fund’s capital needs to be allocated to long-term, sustainable companies with visionary management—not to obsolete, poisonous energy firms led by old-school thinkers trying to squeeze the last pennies out of their dying industry. To be sure, going 100% green is a bold statement for a pension to make, but it’s the best way to protect the assets of pensioners.
We’re moving from dirty energy to clean energy. At this point, it’s only a matter of timing.
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