A survey from Ortec Finance covering 140 pension funds worldwide, reveals pension funds based in the US and Canada are more at risk of poor performance than their European counterparts under a high warming scenario “if the current approach to setting and governing climate policy doesn’t change”.

The research finds that US pension funds are predicted to fare worst from increasing carbon emissions with investment returns diminishing by 50 per cent by 2040, followed by further declines without recovery until at least 2050.

Meanwhile, UK pension funds are likely to perform comparatively better, potentially incurring investment return drops of under 30 per cent by 2040 and reaching 30 per cent by 2050.

Doruk Onal, climate risk specialist at Ortec Finance, says the UK’s resilience is partly due to higher levels of asset diversification compared to the US, where pension funds have a heavy reliance on equities with allocations of 43.8 per cent.

The risk is particularly acute for US pension funds with significant exposure to fossil fuel companies which may become obsolete as economies transition to green energy sources.

Onal says: “Transition risks are expected to be the dominant climate risk driver compared to physical risks during the 2025–2030 period for pension funds worldwide. Additional low-carbon policies, revised NDCs (Nationally Defined Contributions), and net-zero target reviews by global investor alliance groups may accelerate the stranding of fossil fuel assets, potentially triggering market overreactions and widespread disruption.”

The research finds “significant variances” in how disruptive climate policies and transition risks will impact investment returns across pension systems in different regions. Certain UK pension funds are at risk of facing a decline in investment returns exceeding 20 per cent, while some US pension funds could see returns drop by 15 per cent in the short term.

Onal says “These potential declines are driven by the cascading effects of incoming climate policies, including market overreactions and sentiment shocks triggered by the mass sell-off of carbon-intensive assets. Such reactions could lead to liquidity challenges and abrupt price fluctuations as markets adjust asset valuations.”

In contrast, pension funds in Canada, the Netherlands and Switzerland show more homogeneous impacts from disruptive climate policies and transition risks.

Onal says a key reason could be a more stable and consistent policy environment in these countries, where clearer government action plans for transitioning to a low-carbon economy help reduce uncertainty for investors.

Onal adds: “The alignment between government policies and pension fund strategies is essential for pension systems and allows for a smoother adjustment to transition risks, minimising market shocks and promoting more uniform impacts on returns.”

 The decline in investment returns has serious and far-reach implications, Onal warns.

“For pensioners, reduced returns could lead to lower retirement benefits and financial insecurity. Sponsors, including corporations and government bodies, might face increased contributions to cover shortfalls, impacting their financial health. Employees could also be affected by lower pension fund performance, leading to potential adjustments in retirement planning and expectations.”

Guy Saintfiet, partner and head of EMEA fund management in Aon’s Investment practice in the UK, says: “Against a backdrop of heightened market volatility and expensive equity and credit market valuations, institutional investors, such as defined benefit pension schemes, are trying to navigate financial turbulence. Furthermore, in the past few years, and particularly since the 2022 gilts crisis, many have found themselves overweight in allocations to illiquid assets. That can be an issue in itself but is especially a problem for schemes with aspirations to move to an insurance-based solution.

“Liquid diversifiers – alternatives strategies which invest in a range of asset classes and investment styles in both accessible and liquid ways – offer a path to portfolio resilience with genuine diversification. These strategies can help mitigate equity and credit market risks while contributing to consistent and uncorrelated absolute returns.

“However, investors must be clear on their objectives when deciding whether to allocate capital to liquid alternatives. For example, investors with a more short-term investment horizon, such as schemes looking to buyout in the near future, will value a steady return profile. For them, investing in liquid alternatives can play a vital part in maintaining a diversified and more resilient portfolio.”

The process of allocating liquid alternatives can be a challenge for all but the largest institutional investors, as it requires significant expertise and resources. This is why the best approach is often to outsource the implementation.

Saintfiet continues: “Strategic design is vital to ensure a resilient portfolio that can deliver returns across changing market circumstances. This requires investors both to identify skilled managers who can generate consistent and uncorrelated returns, and also to monitor and actively manage the portfolio of underlying strategies and managers as market conditions evolve. Size and speed of execution is also crucial when trying to access highly skilled managers and in negotiating terms.”

Tim Banks, partner in Aon’s UK investment practice, says: “When implemented correctly, our experience is that a liquid alternatives allocation can be a vital portfolio component for institutional investors looking to target steady absolute returns or when they want to improve the resilience of their portfolios. We’ve seen growing demand from clients for diversification and growth assets that provide downside protection – this solution perfectly aligns with these requirements.

“Even amid unprecedented market volatility in recent years, Aon’s liquid alternatives solution still met its performance target, delivering uncorrelated returns when clients needed stability the most. This achievement is a testament to our investment team’s implementation techniques which have consistently supported strong performance despite challenging conditions.”

Research from XPS Group, a consulting and administration business, reveals that nearly half (49 per cent) of LGPS funds have established Net Zero targets.

Further, almost three-quarters (74 per cent) of LGPS funds have switched their investments into strategies with a sustainable objective, while almost all (94 per cent) are engaging with investee companies to drive action on climate change.

Alex Quant, head of ESG research at XPS, says: “It is encouraging to see half of all LGPS funds have already set a Net Zero target or ambition. But conversely, this means half have not yet determined a Net Zero strategy or ambition. LGPS funds have a responsibility to manage key investment risks associated with climate change, and are ideally positioned to take advantage of the long-term opportunities that will come with the climate transition.”

With deep pockets and defined net zero strategies, LGPS funds are primed to invest directly into climate solutions, and the research reveals that more than a quarter (26 percent) of local authority funds had committed to sustainable projects including renewable energy.

Quant says: “With their scale, long-term horizon and appetite for illiquidity, LGPS funds have a clear opportunity to participate in impactful sustainable investments, such as renewable energy projects or forestry. There has been a growing trend toward impact-focused, or place-based investments – which focus on beneficial impact in a locality – where investors feel they can make demonstrable real-world difference with their investments.”

For example, in October 2023 the GBP5.4 billion Avon Pension Fund alongside Wiltshire, Cornwall, Devon, Gloucestershire and Oxfordshire committed a total of GBP330 million to a local renewable energy fund run by Schroders Greencoat.

The money will be used to invest in technologies such as solar, wind and battery storage across the south west.

The Avon scheme now has GBP500 million committed to renewable infrastructure and energy transition assets; a GBP160 million allocation to local impact assets; and GB2 billion invested in transition aligned and sustainable equity strategies.

XPS finds that engagement is the most likely approach adopted by the LGPS funds on their route to net zero, with almost all (94 per cent) describing it as a key tool to deliver the overall objective.

The GBP30 billion LGPS Central pool, which looks after eight LGPS funds, says its engagement strategy extends beyond fossil fuel companies, and it is supporting 167 engagements with the most carbon intensive companies globally across sectors via the collaborative investor initiative Climate Action 100+.

XPS also finds that 14 per cent of funds have set scheme-level exclusion policies, such as fully divesting from fossil fuels by 2030.

LGPS Central says it has “already significantly reduced its exposure to fossil fuel investments and is closely monitoring the impact of climate risk, among other factors, on all portfolio investments”.

Moving forward, the scheme’s trustees have set “a high bar to additional investment in companies deriving a material proportion of revenues from fossils fuels or being resistant to positive change”.

However, Quant adds a word of caution on negative screening: “Our view is that exclusions should be applied at a minimum level, and only for those companies who have not shown any intention to transition their operations/capital expenditure to align with a low carbon economy, and exclusions are most effective when they follow a period of engagement.”

The fund is run by Natural Capital, a boutique fund manager entirely focused on nature, investing in infrastructure which it says “provides climate adaptation and resilience for companies, communities and cities across the UK”. 

Nature Capital’s goal is to close the GBP50 to GBP100 billion gap in finance needed for nature restoration in the UK, while generating “stable cashflows that offer attractive risk-adjusted returns for investors”.

Leandros Kalisperas, WYPF’s Chief Investment Officer, says: “As a large asset owner with a long-term horizon, we have a responsibility to provide direct patient capital to nature as infrastructure and to start to address critical issues like climate change adaptation and resilience here in the UK.”   

Over the next decade, Rebalance Earth aims to mobilise over GBP10 billion towards restoring nature across the UK.

Robert Gardner, CEO and Co-founder of Rebalance Earth, says: “A 2 per cent for nature allocation from the GBP5 trillion in UK pension and wealth assets would generate the necessary funds to address the estimated GBP50-100 billion needed for Nature restoration in the UK.”

He adds: “WYPF is setting the standard on the level of commitment needed to put the brakes on the UK climate and nature crisis. With their investment, we can build an expert team, launch our fund, and restore landscapes and seascapes across the UK. Nature is our ally against climate change, and we need to start rebuilding this natural infrastructure to protect our companies, communities and cities.” 

The bfinance quarterly Manager Intelligence and Market Trends report published this August reveals that while private debt deployment activity is inherently more robust than other illiquid asset classes, due to the more frequent need to recycle capital into the asset class, “investors have also noted the apparent resilience of direct lending strategies and healthy spreads helped, in part, retrenchment in bank lending”.

The report also finds that investors who entered private debt in the 2015-20 period and who are now seeking to diversify and develop these portfolios, are “exploring dedicated exposure to niches such as healthcare”.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “While private market fundraising has slowed slightly, demand for private debt is strong and appetite for real estate is increasing.”

Across the world multi-billion-dollar pension funds are opting to diversify their portfolios with allocations to private debt.

The GBP31.6 billionLondon CIV, the local authority pension pool for the London boroughs and the City of London, is due to launch a new private credit strategy in the third quarter of 2024. The latest tranche in the local authority pool’s private debt strategy will allocate 70 per cent to senior direct lending and up to 30 per cent to asset-based lending.

This April the AUD139 billion Australian pension fund UniSuper has increased its portfolio exposure to private credit.

The fund now holds approximately AUD1 billion in dry powder, which could potentially be invested in the sector.

Meanwhile this July the SOKA-BAU, a German organisation overseeing two pension funds for employees in the construction industry, has committed 5 per cent of its total portfolio to private debt.

And this summer a survey from the Pensions and Lifetime Savings Association’s Local Authority Conference found 36 per cent of Local Government Pension Scheme (LGPS) funds are planning to increase their allocations to private credit in 2025.

The boom in private markets allocations also offers new business opportunities for third party providers supporting administration and fund services.

At the start of the year the GBP56 billion local authority pension pool LGPS Central, announced a “strategic collaboration” with State Street as the provider of fund administration services for its private markets products.

State Street will initially support 13 funds managed by a combination of LGPS Central and its third-party managers in the form of fund administration, registration services, investor services and regulatory reporting services.

Speaking at the time of the appointment, Head of Investment Operations at LGPS Central, Neil Wain said: “This collaboration promises to bolster operational efficiency and further strengthen governance while providing long-term, scalable solutions for our private markets offering. In addition, State Street will provide us with a portfolio monitoring solution that will enable deeper, more sophisticated analysis using online data delivery tools, equipping us with the critical information that it needs – when it needs it – to support effective decision-making.”

This comes from the ABI’s Investment Delivery Forum (the Forum) announcement of its 10-point action plan for investment. It includes the design of a new funding model to facilitate private investment in the UK’s critical infrastructure – specifically a national EV-charging network.  It also demonstrates support for nuclear energy and plans for offshore wind investment.

The funding model, developed in partnership with the Green Finance Institute (GFI) and engagement from His Majesty’s Treasury’s blended finance team, would produce many multiples of private investment for every pound of public investment. In the model, public support (potentially from the government’s new National Wealth Fund) would be used to mitigate the initial risk in new infrastructure that private investors are unable to take, due to regulatory rules.

Once these risks have passed, public financial support would no longer be required, resulting in a self-sustaining financing programme that is ideal for institutions to invest in over years or decades.

In the case of the national EV charging network detailed in the report, it is estimated that less than GBP1 billion of public investment spread over 15 years would support up to GBP20 billion of private investment, driving economic growth. The funding model could also be used to speed up the planning process and the current problem of EV networks being absent from remote locations, both of which are holding back a reliable national charging infrastructure.

Members of the Forum plan to take this model to government, following the announcement of the National Wealth Fund Bill in the King’s Speech.

The Forum, set up in summer 2023, is made up of some of the UK’s largest pension firms and insurers. In its latest report, it sets out progress made over the last 12 months, during which the Forum prepared the ground for increased investment by insurers as the UK reformed its Solvency II regime, which is set to unlock GBP100 billion for productive assets over the next 10 years.

Its 10-point action plan on investment also details an appetite for nuclear investment among several Forum members, as well as longer term aims including floating offshore wind investment. The Forum has said that it will continue investigating newer technologies for investment suitability, such as carbon capture and small nuclear reactors.

The plan features a broadening of the Forum’s regional engagement plans too, which focused on Manchester and the North West in 2023/4. It will expand to cover West Yorkshire, Liverpool, Wales and Scotland in 2024/25.

The Forum will also begin tracking and reporting on investments made under the new Solvency UK regulatory regime, which will be live from January 1 2025. The industry has committed to channel GBP100 billion into productive assets following the changes to regulation. The tracking from the Forum will detail total investment but also the types of projects being invested in.

Further regulatory engagement will continue, including the investigation of options for enhancing the PRA’s approval processes through the use of an investment accelerator or project sandbox.

Tulip Siddiq, Economic Secretary to the Treasury says: “I welcome the final report of the Investment Delivery Forum, which sets out a clear plan to deliver on the GBP100 billion pledge insurers have made to invest in critical UK infrastructure. I look forward to working with the sector in my new role as City Minister as we take action to drive sustained economic growth in the UK so we can make every part of our country better off.”

Rhian Mari-Thomas, Chief Executive Officer of the Green Finance Institute, says: “Partnership is essential if we are going to meet our net zero targets in the UK.  Not just a partnership of public and private capital investment, but also a partnership of ideas – as demonstrated by the Forum and the GFI in building out these innovative solutions to fund essential infrastructure and lower emissions.”

Baroness Nicky Morgan, Chair of the Investment Delivery Forum says: “Members of the Forum stand ready to act to accelerate the nation’s investment into green and good infrastructure. This will deliver growth, jobs and help us meet our net zero targets.

“The work done by the Forum on new funding models, such as the EV charge point programme, are essential to facilitate the flow of private capital into the green infrastructure transition and a number of members see nuclear as an attractive investment.”

Hannah Gurga, Director General of the Association of British Insurers says: “The Investment Delivery Forum has laid firm foundations for the industry to act on the opportunity that reforming the regulatory framework brings, with GBP100 billion set to be channelled into green and good infrastructure over the next 10 years.”

Manganiello’s view follows reports that BlackRock’s spot bitcoin ETF has accumulated USD16.7 billion of assets since it launched in January 2024, and the news that more and more cryptocurrency ETFs are also due to enter the market, with the Ether ETF set to gain final approval from the US’ Securities and Exchange Commission (SEC) this summer.

LIAN Group writes that it is an investment firm that builds and funds companies across multiple industries, including digital infrastructure, AI, cryptocurrency and blockchain. Since launch, they have deployed over USD500 million of invested capital. One company they have built is Cowa, a European blockchain infrastructure company running on renewable energy.

Manganiello, who also serves as a professor of blockchain technologies at Geneva Business School, believes these regulatory greenlights will soon lead institutional investors, such as hedge funds and pension funds, to view cryptocurrency as a viable asset. For Manganiello, it’s only a matter of time until these institutional players muscle into the crypto market, which has traditionally been dominated by retail investors.

Manganiello says: “Crypto ETFs have been given the regulatory green light and, for an asset that has long been considered volatile and novel, it’s a big step. Crypto is beginning to prove the critics wrong; it’s been given regulatory legitimacy.

“I won’t deny that crypto has traditionally been seen as a retail market. But, with BlackRock stepping in and growing its own spot ETF so quickly, it won’t be long until other institutions take the leap and invest in crypto. The Ether ETF approval will only be a catalyst.

“Crypto can be highly profitable – and institutional investors will definitely look to take advantage of it as they look to diversify their assets. That’s why I think by the end of next year we’ll see crypto ETFs form a decent chunk, and at least 5 per cent, of hedge fund and pension fund portfolios.

“At the end of the day, it’s incredibly important for institutional investors to stay ahead of the curve. They have to adopt what I’d call a “millennial savviness”, an approach that embraces emerging, innovative alternative investments – and isn’t bogged down with preserving the status quo. With crypto, it’s no different; institutional investors, like hedge funds and pension funds, have to be ready to consider crypto as an asset – and especially with crypto ETFs quickly gaining approval.”