"Mitigating climate change is the challenge of our lifetime. Politics, business and societies across the globe need to act as one to rapidly reduce climate emissions. We, as asset owners, will live up to our responsibility and, in dialogue with the companies in which we invest, steer towards low-carbon business practices. We’ve already started and, by 2050, our portfolios will be climate neutral "—Oliver Bäte, Allianz’s CEO.

How far can the wrinkle be stretched?

By most metrics, this has been a remarkable year for investors in the US market. Stocks are up more than 15%, but the market cannot go up indefinitely, even if millions or trillions of dollars are still injected artificially into the American economy, often in financial aid at zero interest.

In almost all countries the pension industry is in a dilapidated. In a Citibank report from 2016, the main nations of the Organisation for Economic Co-operation and Development have a US$78 trillion shortfall in funding to pay and defined-benefit public pensions’ obligations. This shortfall is far from trivial. It is equivalent to about 1.8 times the value of these countries’ collective national debt.

The private pension sector is no longer strong. Such is the case of the USA, for example, 18% of pension funds has not the funds necessary to meet their liabilities. That equates to a US$3 trillion shortfall. Given the importance of the US economy and its financial markets to the global financial structure, this should not be taken lightly.

Instead, it's the $17 trillion in official debt plus the $43 trillion in Social Security off-the-books debt plus the $179 trillion in the rest of the fiscal system's off-the-books debt. Stated differently, the entire federal system has a fiscal gap of $239 trillion!

The pension system in the United Kingdom is also not in the best conditions, Its overall funding level was only 67.7% in March 2017, equivalent to a £736.2 billion deficit.

To have a perspective according to the terms, the market capitalization of the large banks before the explosion of the subprime bubble was infamous compared to the size of the pension fund deficit. For example, in 2007, the peak market capitalization of the Royal Bank of Scotland and of Lloyds Banking Group was £64 billion and £33 billion respectively. Yet by the end of 2009, the British government had to inject £850 billion in a rescue package to save the UK bank sector from collapsing.

Can we print all that money?

Running to cover

From that crisis, the beaten asset owners increased their positions in lending to the poor through microfinance, lending to medium-sized corporations, and structured products, as well as alternatives including private equity and real estate.

Sustainable finance

Climate risk has received this summer in Europe the definitive boost to become a strategic business issue ... where this consideration had not yet been achieved. There is no turning back. Nor can we look the other way.

Remember that complying with the Paris agreements in 2030 requires that the European Union invest 180,000 million euros annually, which, for the most part, will come from private savings. A saving that must be redirected towards sustainable investment through the most appropriate channel: sustainable finance. It seems that we are preparing to continue inflating the stock market, but the risks previously placed could be covered.

The package of measures approved by the EU includes four very relevant documents for the financial sector as a whole, but also other industries. First, the Guide on how to report climate-related issues, which integrates the recommendations made in 2015 within the Financial Stability Board known as Task Force on Climate-related Financial Disclosures (TCFD). This guide provides practical recommendations to companies on how to report the impact that their activity has on the climate and vice versa, the impact of climate issues on their income statements. These guidelines will provide more light to the approximately 6,000 listed European companies, banks, and insurers that must comply with Directive 2014/95 on reporting non-financial information. And it will allow investors to make better decisions when assessing the degree of sustainability of the different financial assets.

Pension funds expect that the share of sustainable investments will continue increasing in the coming years. There are several reasons why pension funds take longer-term sustainability interests into account in their investments. Pension funds e.g. find that it is important for the globe and the returns of their investments.

The digital preservation of value

Minimizing high exposure to the traditional financial system definitely will protect assets against a potential system crash, The idea is not to buy Patagonia to charge the oxygen to the world, the idea is to prevent the falling of the system. The digital assets through a tokenization process can be used to digitally storing the property rights to a thing of value (asset) on a Blockchain or distributed ledger, so that ownership can be transferred via the Blockchain’s protocol.

The “tokenization” of financial investments opens up this opportunity for a wider group of stakeholders to invest. Investors with larger amounts of capital would share the same automated process as investors with very small amounts of capital; therefore, access and entry requirements are democratized. This will remove the need for third parties and could enable projects that attempt to tackle environmental challenges to access capital quickly, without being delayed by the red tape that is often a part of doing business with big institutions.

Barriers

Completing the Capital Markets Union (CMU) is important to remove barriers for cross-border investments and boost pension funds’ investments in Europe, Asia, and the Americas. Besides removing barriers for cross-border investments in general, here must be enough big infrastructure investment opportunities available across the world that match pension funds’ needs.

Other thing is that usually, if a Pension Fund, for example, the Danish pension funds, wants to invest in a project in Bolivia rainforest they need to call some fund manager to do that, them the fund manager need to research and find a good quality sustainable project in this geographical zone, it gives a very difficult problem.

Overcoming these barriers and some others, we can protect ourselves from the hard times that will come and we will greatly save the planet's assets, and our fortune, without needs cutting down all the forests to paint papers them with the eye that sees everything.

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Will the Asset Owners Save the Planet?
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Sources: 

Social Security just ran a $9 trillion deficit, and nobody noticed

Tony Byrne: The pensions system is like a giant Ponzi scheme

Pension Funds Statistics and Trends 2018

Huge pension fund deficits are a global crisis in waiting

Germán Malavé
Written By
Germán Malavé
Alternative Finance | Sustainable & Impact Investment | Fintech World | UN SDGs | Sucre.IO Co-Founder & CEO