Road to COP26: Productive Finance and the Net Zero Ambition
Nigel Wilson is CEO of the Legal & General Group, a British multinational financial services company headquartered in London.
This article is part of a series of commentaries, in collaboration with the British Embassy in Beijing, in the run-up to the 26th U.N. Climate Change Conference of the Parties (COP26), scheduled to take place in Glasgow in November 2021.
Across the U.K., China and the rest of the world, we share enormous economic and societal challenges — climate change, aging societies, cities for the future — challenges that also create amazing opportunities. Two years ago I brought my senior executive team to China to see for themselves how a long-term vision combined with fast-paced delivery can create cities of the future like Shenzhen and Shanghai. We too are working on cities of the future: clean, green, low carbon places, created using the power of older peoples’ money, but where people of all generations can work, live and relax together.
Climate change represents the biggest investment opportunity ever for China and the U.K. Onshore and offshore wind, solar, nuclear fusion, green hydrogen and carbon capture (to cite a few examples) will all play a critical role. Renewable energy is clean, green and cheap. China is leading the way in the electrification of buses and we need to follow its lead and also accelerate the use of electric vehicles (EVs) and hydrogen-powered trucks. Globally, at least $30 trillion of investment is needed for net zero carbon emissions to be achieved, and this is an opportunity that Legal & General is seizing.
We are funding the introduction of a national EV charging system in the U.K., the development of perovskite to deliver the most efficient solar panels in the world, building wind and solar farms, and investing in world leading science to advance the efficiency of tokamak in nuclear fusion. As a large U.K. homebuilder, we are ensuring all homes we build will be operational at net zero carbon by 2030, and we are investing in ground and air source heat pumps to replace hydrocarbon boilers.
The alignment between the U.K. and China toward net zero carbon emissions creates huge opportunities for collaboration at the policy and business levels between the two countries. In our role co-chairing the U.K. government’s COP26 Business Leaders Group, Legal & General can play a role helping to ensure full and productive engagement between global policymakers and businesses.
Legal & General was formed in 1836. Our oldest customer is 107 years old. Since retiring 40 years ago, he has received income from us in the form of a pension annuity. He symbolizes one of the big global trends that drives our business: the aging demographic.
In most of the world, we are living longer and having fewer children. By 2050, more than a third of China’s population will be over 60 years of age. The average life expectancy in China is now 77.3 years — a great achievement when it was only 57 years in 1957. The percentage of life spent in retirement will reduce — retiring in our 70s will become the rule, not the exception.
Longer life is perhaps mankind’s greatest achievement, and we should celebrate it. Too often though, we focus only on the challenges for our economies and for individuals. How to pay pensions for more people for longer retirements, and how to carry the higher health and social security costs of an aging population are major policy issues for governments across the world.
An aging demographic calls for different thinking from businesses. First, there is a need for more long-term savings. The OECD countries’ collective pension fund assets are estimated at $32 trillion, but they need to grow further as more people put money aside for a longer retirement. The world is long of pension liabilities — the promises of income in retirement made to people — but short of the assets we need to meet those promises. We cannot rely on existing assets to deliver, when government bonds deliver miniscule (sometimes zero or even negative) rates of return. Neither can we rely on the same limited pool of real physical assets circulating at rising prices and hence falling yields.
So more suitable assets need to be created for funds to invest into in order to match long-term pension requirements. There is an obvious synergy here, as the world needs more energy efficient housing, clean green and modern cities, better infrastructure and more capital for growth companies. The funding can’t all come from governments and taxes. Pension and insurance funds will play a role investing in the right assets with which to pay retirement and insurance promises. In the U.K., we predict pension funds and insurers can invest between $200 billion and $250 billion in infrastructure over the next 10 years. This is productive finance being put to good use.
We need to pivot the global economy, switching away from exclusive capitalism to investment that is both economically and socially useful, and inclusive in that it creates positive, sustainable change. If my pension fund earns a return by investing in clean, green infrastructure that my children and grandchildren use, and which makes their towns and cities better places to live, that is a win for all.
As with the aging society, dealing with climate change is driving huge technological change. Science and technology is advancing faster than at any time since the acceleration of the Industrial Revolution in 1840 — quantum computing and biology, artificial intelligence, machine learning, nuclear fusion, electric vehicles, zero carbon housing — and will profoundly change our lifestyles and the quality of our lives, hopefully for the better.
So while the debt that funds offshore wind generation can provide stable retirement income, there is also a place for the higher-risk equity funding to launch and operationalize more nascent technologies as varied as green hydrogen, electric vehicles, batteries and carbon capture. This is about asset allocation so investors avoid transition risks and stranded assets as global energy supplies switch from hydrocarbons to newer, more climate-friendly alternatives. Renewables like solar and wind are growing fast and are economically viable in their own right, and can be tailor-made for capital markets, as much of the cost is upfront capital expenditure rather than the operating expenditure involved in generating energy from hydrocarbons.
As China further accelerates the modernization of its capital markets, this will ensure that capital is allocated efficiently, supported by modern methods of risk management, and will also deliver efficient two-way flow of capital addressing the current significant under-allocation of global investors to China. By riding the unstoppable trends of aging and decarbonization we can make investment both economically successful and socially useful. Finance needs to step away from short-termism and realize the part it can play in helping solve the challenges the world faces.
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