OECD calls for ‘loud, long and legal’ govt policies to boost pension fund green investing

Governments need to introduce policy that is “loud, long and legal” if they are to boost investment in green assets by the $28 trillion global pension fund market, according to a pivotal report by the OECD. The paper, titled: The role of pension funds in financing green growth initiatives, makes a comprehensive review of current pension allocations to environmental financing, which it says amount to less than 1% of current asset allocation. The low levels of green investment, it says, are partly due to poor environmental policy support. However, the OECD says investors additionally lack appropriate investment vehicles, market liquidity and scale, and also face regulatory disincentives. They also have a general lack of knowledge and expertise about green investments and their associated risks. To create what they call institutional “investment grade policy”, the OECD said government support for green pension investing needs to be financially significant (loud), implemented over a sustained period (long) and with clear regulatory frameworks (legal). The United Nations estimates that $1.6 trillion per year in total investment could be needed to transition to a low-carbon economy over the next 20 years, requiring larges sources of private capital. As long-term investors, pension funds have been identified as a prime source of potential funding if the right incentives are in place.However, the OECD says many “green” technologies are currently uncompetitive because they are not yet commercialised and require major fiscal support. By contrast, it says existing “black”, carbon intensive technologies are mispriced due to unaccounted pollution externalities as well as the significant subsidies they receive. Investors looking to invest in green technology have faced serious uncertainty. Problems with American Production Tax Credits (PTC) were a contributing factor to an investor exit from the wind power sector. Retroactive policy changes regarding solar power projects in Spain have also been concerning investors. A survey by the Institutional Investors Group on Climate Change (IIGCC) also found that less than 10% of their members thought the EU Emissions Trading Scheme (EU ETS) provided a strong enough price incentive to switch away from carbon-intensive investments.
The OECD paper makes a series of recommendations aimed at countering this uncertainty. It says the most important is tighter carbon pricing, the removal of fossil fuel subsidies and the introduction of credits and government guarantees for renewable energy. The report says: “Without a strategic focus on these policies, climate finance from the private sector will not happen.”
In addition, it says governments and international
financial institutions can improve deal flow by ensuring that adequate, investment-grade deals at scale come to the market – particularly in infrastructure – for pension funds to invest in. Examples, it says, could be vehicles specializing in early-stage projects and public sector finance either investing alongside private sector and institutional investors or taking subordinated equity positions. The issuance of related green bonds, it adds, could also help improve liquidity. Governments should also support setting up a “rating agency” to approve green projects such as that proposed by the ClimateBonds Standards Scheme. Policy makers should also engage with investors to remove investment barriers to long-term green investing, which it says may include mark-to-market accounting that appears to be forcing pension funds into shorter-term assets. Finally, the OECD says pension regulators need to improve pension fund governance and resource pooling to encourage long-term investment commitments. This it says could include prompting or requiring them to consider environmental, and social and governance (ESG) issues in investment analysis.

See downloadable documents (left hand column) for report