Governments can do many things to help tackle climate change. Insulation in older houses is in the news. New houses matter too. I know of a new housing estate, under construction now, with a gas boiler in every home. No heat pumps. No solar panels. Planning laws could be tweaked to make that impossible (or financially unattractive). But no such tweak has happened to date, although it is reported to be under consideration by the government.
Yet laws have been tweaked to put regulatory and other pressures onto pension scheme trustees to consider holding green assets. (Interestingly, pension scheme trustees, but not charity trustees.)
And now the government is helpfully addressing the new demand for green assets (which its regulations created) by issuing a green asset. The first “green gilts”, issued this month, were over-subscribed despite having, overall, a yield 1.5bp lower than the nearest equivalent traditional gilt. That’s the “greenium” which the sponsor of a DB scheme (or the member of a DC scheme – including most automatically enrolled members) would pay to the Treasury, in the form of a lower return for essentially the same asset.
For that recurring, annually-compounded price, what do they get? (1) A green-tinted gilt instead of the equivalent gilt-edged gilt. (2) A slightly salved conscience. (But only if they (a) are aware of, (b) understand, and (c) agree with, the investment decision that has been made at their expense.)
Fine, I suppose. But… don’t low gilt yields make DB pension liability values appear higher? Haven’t low gilt yields already resulted in many employers paying increased deficit reduction contributions? Hasn’t this hastened the end of DB pension provision and made annuities very expensive for DC members? So why would a DB trustee – or any trustee – buy a green bond, with an even lower yield?
If it was my own money, I might have an answer (notionally, that is, as green gilts are not yet directly available to retail investors). I believe that human activity plays an important part in climate change and I want to invest in a better future for my children. Yes, I could buy a battery-powered hatchback instead of my Chelsea tractor. I could eat more plants and less beef. I could use a renewables-only electricity provider. But, instead, my chosen contribution to avoiding a global calamity is to lend some of my money to Rishi Sunak on the cheap. As an individual, I don’t have to take advice on that decision: I just go online and select the green fund in my ISA or in my DC pension pot. In my heart, I feel like this will help the planet more than if I spent my money on, say, insulating the loft. Maybe part of me does suspect that lower yields on green gilts are just a stealthy “eco-conscience tax”. But, as an individual investor, I’m ok with that.
But as a trustee, I have to take advice and to act rationally. Regulations say that the best financial interests of my members must be my guide, because the pension fund is not really my money. So could I ever justify to a DC member (or to a DB sponsor) why I bought (or allowed my investment manager to buy) a green gilt? It’s the same covenant as an ordinary gilt. Same redemption terms. But lower returns. Why?
What could possibly justify that investment decision?
- That I believe, after taking investment consultancy advice, that a government which still allows gas boilers in new-build housing estates is going to do something extraordinarily green with the money it raises from green gilts: exciting new initiatives (“non-financial considerations”) which go beyond the politically expedient steps that would have been taken in any case.
- That every member has an interest in living on a planet which will not be flooded, or scorched by fire and drought, of course, so I believe as a trustee that it is really in my members’ personal interests to reduce HMG’s borrowing costs at the members’ own expense through how their pension fund is invested. (But if they really thought that, why would members invest in a tax sheltered DC pension fund in the first place? If they want to help the government to fund green initiatives, why not just buy gilts or shares out of their taxed income and pay CGT and income tax on the returns?)
Shareholder engagement is one thing: and it might make a lot of sense in terms of delivering some ESG objectives, some of the time. And disinvesting in badly run companies (while probably less effective than active engagement) could alter their cost of capital in future which might, perhaps, influence behaviour at some future point. But selecting “green” investments (especially bonds, and most especially green gilts) calls for more critical thinking than it’s currently getting. It is hard to see why the recent issue was so oversubscribed, unless one accepts that it was largely a matter of fashion – which, for some people, smacks too much of tulip bulbs.