Home Supporting structure Sharing risk in climate initiatives can generate sustainable returns – The Irish Times

Sharing risk in climate initiatives can generate sustainable returns – The Irish Times


On July 18, Dublin’s Phoenix Park recorded the highest temperature since its weather station opened in the early 1880s. The catastrophic effects of climate change are becoming more apparent over the years and its impact is growing. come closer to us.

We know that a vast transformation is necessary. Our economy, and all others around the world, must go carbon neutral and drastically reduce greenhouse gas emissions. Governments undoubtedly have a vital role to play through their regulatory actions and programs. However, the public purse will not meet this challenge alone, nor should it be forced to do so.

Individual savers, pension plans and the asset management industry also have a vital role to play. Many Irish investors are beginning to take significant steps towards more sustainable investment portfolios. Consumer data illustrates a growing preference for sustainable products, services and solutions to life’s goals, and pensions are no different.

At Irish Life, we have already taken steps to manage the impact of our investment decisions on the environment across our proprietary portfolios, which are part of €40 billion of sustainably managed assets. Listed companies that lag behind the climate are underweighted; climate leaders are overweighted; and all are analyzed and actively pressured for continuous improvement.

Using carbon intensity as a benchmark for a portfolio’s impact on climate change, these portfolios have seen a reduction in intensity of more than 25% since 2019.

Ireland’s commitments to support the transition to a sustainable economy amount to €20 billion a year before many significant but unbudgeted costs are factored in. A major transformation is needed in our national economy – a transformation that we can neither avoid nor delay.

Substantial new investment to support Ireland’s transition to a low carbon economy is needed to ensure we can meet our climate change commitments. Critical areas include our transportation infrastructure, power generation and energy efficiency; our portfolio of residential, commercial and office buildings; water, waste and renewable energy companies; and agriculture and forestry.

In truth, every sector of our economy where carbon and greenhouse gas emissions are present requires drastic action to meet our climate challenges and commitments. These next steps will be difficult, but they are necessary and actually create an opportunity to reward invested capital and generate long-term income streams.

Most Irish investors still have a long way to go to fully participate in this new economy and enjoy the associated returns. However, there are immense investment opportunities for the private sector, given the innovation and technological developments needed for an effective transition..

These investment opportunities include the electrification of our public transportation system; charging infrastructure for our vehicles; conversion to solar energy of housing, air conditioning and heating for homes and offices; and technology for long-term energy storage. In Ireland, we are still in the early stages of the investment cycle for these critical initiatives.

Technological advances in carbon capture and hydrogen generation to manage costs and achieve efficiencies while reducing emissions, provide opportunities for further development and capital investment opportunities.

Overall, investors should also consider the risk of loss on capital that remains invested in assets and businesses that fail to make a meaningful transition.

The simplest analogy is often the one closest to home: our diesel and gasoline cars, our poorly insulated homes, our high-emission farms and businesses will all lose relative value over the next five to ten next few years, unless we manage to transition to a more sustainable future.

The same is true for our pensions and savings: if we do not take climate transition into account in the allocation of capital, we are very likely to suffer longer-term losses.

The immediate requirement is to accelerate the process of identifying and overcoming the obstacles preventing private capital – our pensions and our savings – from investing in the economy in transition. For example, most of our state’s pension capital is invested in the stocks of public companies listed on global stock exchanges and in bonds issued by governments and corporations. For the most part, these stocks and bonds can be bought and sold instantly – they are very liquid.

Most pension funds have a strong desire for highly liquid investments as this allows them to meet obligations (although in reality this flexibility is often not called upon). Thus, illiquidity is a barrier for pension funds investing in climate-focused infrastructure. Similarly, risk thresholds, duration and “J-curve” characteristics present barriers for some private sector investors.

While these issues represent a potential barrier to private sector investment, it is often a different set of challenges that are of greater concern to the state. The state, for example, has little need for high liquidity and can be very patient on “J-curve” investments. The greatest challenge for the state is often to mobilize resources, attract capital and support investments that do not fit naturally into the state balance sheet or into the public sector.

It is on these foundations – the common goal of investing in a more sustainable economy and achieving a complementary balance of our distinct investment criteria – that we can build a sustainable model of risk and reward sharing. Therefore, it is now appropriate for asset owners, pension plans and asset managers to work in partnership with government and develop risk-sharing strategies that support investment and better manage these barriers.

For example, a structure in which the state and private pension funds co-invest to support climate-focused solutions, and which includes measures in which the parties assume different elements of the liquidity premium, smoothed returns and /or different levels of capital is possible, if not essential, in order to maximize the capital available for Ireland’s transition.

The public and private sectors are already working in an integrated way to improve the coverage and adequacy of retirement savings. An incentive and progressive tax system supports our public and private pension sector. Further examination of risk-sharing opportunities would enable the national pension system to accelerate new economic growth and participate in more sustainable returns and a more sustainable future for all.

This is where the greatest opportunity lies, where long-term investors are most likely to be rewarded and where Ireland can clearly demonstrate international leadership in this essential transformation. Time is not our friend. The impact is getting closer to home.

Patrick Burke is Managing Director of Irish Life Investment Managers