Time for pension funds to go green on projects

While most of us understand the importance of saving for retirement, few understand how retirement money is invested.

Traditionally, pension funds are invested in a limited range of assets — mostly government and infrastructure bonds, equities, cash and real-estate. These investments make sense; they provide good returns with minimal risk.

However, while returns and growth of our pension funds are important, that growth shouldn’t come at the cost to the environment. With 70 per cent of jobs in Kenya related to our natural environment, climate change will touch everyone from farmers and fishermen to tourism operators and teachers.

Greater awareness for the need to shift to environmentally sound economic activity has resulted in more demand for opportunities to invest in green projects, which provide financial returns and build a sustainable society.

Consider the growth in green bonds. In 2017, there was about $156 billion (Sh16 trillion) of green bonds in the market. This year, the market is expected to grow to between $250 and $300 billion.

In Africa, a $500 million bond, issued by the African Development Bank in 2013, funded green projects including renewable energy, sustainable urban development including better public transport and waste management. Global pension funds and investment banks are among the major investors in the bond.

In South Africa, a $80 million bond to fund water utilities and low-emission public transport in Cape Town was four times oversubscribed.

Earlier this year the National Treasury announced Kenya would issue a green bond during the 2018/19 fiscal year. Once launched, Kenya will become the third African country and the first in East Africa to issue a green bond, reinforcing our leadership in financial innovation in the region.

Green bonds will be an important resource for funding the Government’s Vision 2030 and a transition to a green economy. This is an ambitious goal, which will require significant investments.

The Kenya Green Economy Strategy and Implementation Plan (GESIP) estimates that it will cost Sh2.4 trillion to transition to a green economy. Raising this capital will be one of the biggest challenges to delivering the plan. However, with the right systems and structures in place, there is opportunity to become active investors in greening our economy.

There is about Sh1.2 trillion invested in our pension sector. The money is invested across 14 different types of assets, with most invested in government securities, quoted equities and direct property investments. One of the biggest emerging concerns for the pension sector will be the impact investments will have on climate change and vice versa. Globally, by the end of the century, climate change is predicted to remove $ 2.4 trillion in value from pension funds; Green means mitigating environmental, social and associated financial risks.

But before pension fund trustees have the courage to invest in green bonds there are several gaps which need to be addressed. One is ensuring that investors have better access to data on environmental and financial risks and returns to help inform decision making across all investment options. Robust reporting on behalf of the issuer is also needed to prove the money was being invested correctly. There is also need for independent verification of green compliance status of the bond.

Pension funds need to change as well. By their nature, green projects and green bonds tend to be long-term investments. Just as a pension fund contribution is a 30-40-year investment for members, trustees and fund managers as custodians of those funds need to have a long-term horizon when making decisions. Since 2017, several organisations have been working together under the Kenya Green Bonds Programme, to lay the foundations needed to develop Kenya's green bond market. The programme, endorsed by the Central Bank, the Capital Markets Authority and the National Treasury, has seen the Kenya Bankers Association, Nairobi Securities Exchange, Climate Bond Initiative, FSD Africa and the Dutch Development Bank FMO collaborating to build strong foundations for Kenya’s green bond market.

The programme has focused its attention around several key areas. From providing training to the entities who will issue, invest and verify the bonds, to ensuring the policy and regulatory structures are in place. And conducting research on the demand and priority areas for local green bonds.

As the Retirement Benefits Authority, our role with the programme has been to make sure when the first bond is issued in Kenya, trustees and fund managers have the knowledge to make informed investment decisions.

Such investments must kill two birds with one stone: achieving desirable returns and yielding environmental and social dividends not only for future generations but also the retirees themselves.

Very few of us stop to consider how our pension funds are investing our money. And while returns are critical, there is an increased need for us to think about how these investments are improving or degrading the environment. After all, what is the value of a pension, if the environment and society that we will retire to has been destroyed?

NZOMO MUTUKU, CEO, Retirement Benefits Authority.