The local pension sector can be a key stimulus for climate investment

This month, nations will come together for the United Nations Climate Change Conference (COP27) in the green city of Sharm el-Sheikh in Egypt.

Each year, countries commit to making amends in key areas such as carbon emissions. The centrality of finance as a catalyst for climate change was reiterated. As such, pension funds can be integrated to drive change and generate satisfying value for their members.

As the largest mobilizer of private finance in the world, pension funds have enormous potential to change the fight against climate change.

With assets under management (AUM) approaching the 1.5 trillion shillings mark, local pension funds are the largest institutional investors with substantial long-term interests – enough to influence environmental, social and governance (ESG) investments ).

As ESG legislation becomes ambitious, pension fund trustees have a fiduciary duty to protect the financial interests of their members.

As a result, trustees and fund managers are often faced with a ‘value vs. value’ dilemma in the investment decisions they make, and must act with the utmost financial prudence.

In the wake of the sustainability debate, the trustee could also be tasked with educating members about the need to embrace ESG values. The ESG pillars have been around for decades. They have evolved over the years. The concept took hold in the 1970s when investors began to align themselves with social concerns such as apartheid in South Africa.

However, it is only in the 2020s that there has been an increased sense of global urgency on climate issues that seems to have brought the three pillars together. For example, climate change threatens not only investment portfolios, but also employer contributions and the retirement life of savers.

This is why pension funds should prioritize ESG. There have been many calls to standardize ESG reporting to enable comparability between companies.

This will allow trustees to align ESG with funds’ investment strategies and measure their risk exposure.

Conversations about gender equality, human rights abuses and climate change are unlikely to die down, especially among younger generations.

Pension schemes should therefore seize opportunities to support sustainable retirement solutions.

The author is CEO KenGen Staff Retirement Benefits Scheme