Climate investment at risk as young adults shun banks and savings

A study undertaken by the Green Alliance on behalf of fund management firm Hermes has found that Generation Y – those born between 1980-2000, the demographic most vital to the future of the savings sector – has very little interest in long-term saving or challenging unsustainable investment practices.

The scale of the disillusion felt by Generation Y means they are both risk averse and financially cautious. The research also found that this generation is largely unaware that the value of their savings is being exposed to climate change-related risks.

Firstly, stock market holdings in carbon intensive sectors such as fossil fuel extraction are an important component of many pension portfolios. Research suggests that fossil fuel companies may be significantly over valued, creating risks that the pension pots of young adults could be subject to substantial write downs.

High-carbon investments face additional long term financial risks from both climate change-related shocks and from the macroeconomic instability that would accompany significant warming of the climate. The young people surveyed within the report were not aware of these risks.

Furthermore, many of those surveyed were sceptical about financial approaches focusing on investment opportunities in the low carbon economy, indicating that they may feel less willing to influence their environment than previous generations.

New approaches

The report points out that society needs a strong, resilient savings sector to tackle major social and environmental challenges. The transition to a low-carbon economy will require significant capital investment over the course of the next two decades and individuals’ savings will be an important source of infrastructure funding.

Projections show that, without a significant growth in investment in low carbon projects and sectors, Generation Y will be retiring into a world deeply affected by dangerous levels of climate change.

In order to address these challenges, the report suggests a number of measures. Auto enrolment, the government programme to enrol UK workers into workplace pension schemes, represents an opportunity to tackle this savings challenge.

Effective engagement with the financial sector on climate and environmental issues will enable young adults to assume more responsibility for how financial institutions use their savings, encouraging scrutiny and rewarding good practice.

Nevertheless, new approaches will be needed to ensure that auto enrolment delivers. Generation Y will need to save sums over and above those mandated by auto enrolment if they are to enjoy adequate incomes in retirement. There is also a need for stronger safeguards to ensure their pension pots are not exposed to unacceptable levels of risk from climate change impacts.

Climate risk management

The study also recommends that the savings sector should actively communicate product level information on climate risks to engage savers on these issues.

“If consumer choice is to be a driver of change in the savings market, the savings sector will need to adopt approaches that enable savers to differentiate between investment products based on their resilience to climate change,” the report states. “For pensions, this would mean product specific information on carbon emissions and strategies for reducing climate risk.”

It also argues that the Government should work with stakeholders to define how new forms of conditionality addressing climate change could be applied to tax relief, such as developing criteria for assessing the appropriateness of pension funds’ approaches to climate risk management.

Commenting on the findings, Green Alliance director Matthew Spencer said: “If Generation Y are to enjoy decent pensions, their savings need to be resilient to climate change. Sustainable investing can help the financial sector rebuild trust among young adults, by showing how finance can be a long-term force for good. This will need more effective communication of the financial risks of climate change.”

Maxine Perella