By Mathew Carr

July 16, 2021

Pension funds with net zero and other climate targets may decide to buy EU carbon permits as a way to ensure they credibly meet them, according to Lawson Steele, an analyst at Berenberg.

Buying EU allowances is a “perfect” way to meet targets because for every permit bought, someone who would otherwise buy it is being forced to cut his or her emissions, Steele said.

“I do think that is going to happen,” Steele said Friday at the Argus emissions conference. There’s a double win for pension funds — a profit and/or helping save the planet, he said.

They can buy permits and cancel them to meet a target, or a carbon intensity limit for their portfolio. Or they could tie them up and hold them and make a strong profit as prices rise. “You’ve created a profit, and on top of that you’ve done an awful lot of good for the planet,” Steele said.

Asset Owners have a unique role in the global economy and financial systems. They have been agitating and driveingthe development of industry best practice through investment mandates. As pension funds and insurance companies, they have long-term investment horizons and liabilities. They are not only vulnerable to the systemic disruptions that climate change will bring onto ecosystems, societies, and economies, but also have a key role to play in catalysing decarbonisation of the global economy.

Representing $6.6 trillion assets under management, the United Nations-convened Net-Zero Asset Owner Alliance includes pension funds and insurers seeking to align portfolios with a 1.5°C scenario, addressing the carbon budget implied by the Paris Agreement. They’ve published a protocol for 2025 targets (see below).

Carbon credits other than government-issued permits like EU allowances may not be as attractive for meeting targets. Some voluntary credits are criticised and may be seen as risky to pension funds wary of public relations damage (even if the criticism of the securities is unfair).

There are other reasons for pension funds to buy allowances.

Trevor Sikorski, an analyst at Energy Aspects, said the need for risk management by emitters will become acute, especially as the EU stops giving away free allowances to factories at a faster rate over the next several years. Emitters may be reluctant to sell even spare allowances, creating a market shortage.

“This is the beginning of the carbon super cycle,” which pension funds will probably find is an attractive reason to buy, Sikorski said at the Argus event.

The analysts didn’t clearly say when any additional buying is likely to happen.

Steele said Australian pensions funds — big because paying into a pension is mandatory in that country — are being criticised for not doing enough to save the climate.

The Commonwealth Bank, one of Australia’s largest banks, has set up an office in the Netherlands, where EU carbon is now mostly traded, after shifting away from Britain amid Brexit.

(Updates with comments, context on target setting)

Target-setting protocol: https://www.unepfi.org/wordpress/wp-content/uploads/2021/01/Alliance-Target-Setting-Protocol-2021.pdf