Following in the footsteps of France, the British government announced last week its plans to ban the sale of new petrol and diesel cars from 2040.
The decision is part of a bid to tackle air pollution, which is the largest environmental risk to public health in the UK, costing up to £2.7bn in lost productivity in 2012. The UK is one of 17 EU countries breaching annual targets for nitrogen dioxide, a problem which has been made worse by the failure of the European testing regime for vehicle emissions.
But how will this impact pension schemes?
We already know that pension funds are big investors in oil, statistics from gofossilfree.org say that local government pension funds alone invest £14bn in fossil fuels. Data is less readily available for private sector schemes but given that on average 50 per cent of schemes' portfolios are passively invested, the figure is likely to be high. This is because many passive investments track indices such as the FTSE, which has a lot of high carbon companies.
Pictet Asset Management senior investment manager thematic equities Christian Roessing also noted that those pension funds with exposure to car manufacturers will be impacted as they will have to invest substantially to meet the no diesel or petrol by 2040 policy.
“There will be less demand for oil, and car manufacturers will need to invest in greener technology. We (Pictet- Clean Energy fund) have seen a sharp acceleration in the e-mobility trend led by Tesla having a lot of traction and the tightening emission standards for auto manufacturers. Recent emission scandals, such as Volkswagen in 2015, have accelerated this trend.
“These matters are forcing existing auto manufacturers to increase their share of electrified cars. For example Volkswagen have confirmed they are looking to build a higher share of electric vehicles, plug-in electric vehicles and hybrid cars into their range, and are aiming for a 25% share of electric vehicles by 2025,” he said.
ShareAction investor engagement manager Anne-Marie Williams believes the announcement will help reinforce the need to take into account climate risks when looking into investments. “I think there are various developments that we’ve had over the last couple of years which have been moving things in that direction, such as the Paris Agreement.”
“It’s another illustration of the direction of travel and confirmation of what we know is happening already, basically the decision of the government to do this is almost a cover up for its weak plan to deal with air pollution. I think the way that technology is moving so fast, it will happen by default anyway without the government making a ban.
“What the announcement has been helpful with is that it has clarified what is happening and certainly for people who aren’t close to the coal face, for your average man in the street, this will be a wake-up call. I think it will be helpful for pension fund trustees because the trustees on pension funds are not the people working in the environmental industry, close to the detail of what’s happening. Policy and what the government says are very powerful and so I think it really will affect the trustee board of pension schemes.”
However, Portafina managing director Jamie Smith-Thompson argued that it won’t have any impact at all in the short term because it is “simply a statement of intent from the current government about an event 23 years in the future”.
“You’d do well to accurately predict what the government will do next year, let alone what things will look like so far ahead. Even if new cars are banned from using petrol and diesel it would take many years to replace the existing stock of cars. And then there are all the other uses for oil, from large scale air and water transport to plastics. Oil won’t last forever of course, but any replacement for it will also be investable, and there is a good chance that the same energy companies providing oil based solutions now will still be there in the future providing the new alternative,” he explained.