‘Green revolution’ could have significant financial benefits, Town Hall report finds

A ‘green revolution’ could be beneficial to council finances, according to models produced by business whizzes for the Town Hall’s pension fund.

Actuaries at Hymans Robertson analysed three different visions for the next 20 years: ‘the green revolution’, ‘challenging times’, and ‘head in the sand’.

Around 5,000 different scenarios were built into the models.

The company uses probability distributions to project possible outcomes for returns on assets and economic variables, though some of the model’s parameters are dependent on the state of the markets when it was generated, in this case October of last year.

Camden’s executive director for corporate services Jon Rowney said: “The pension fund recognises the risk that climate change poses in its risk
register. In particular it identifies that fossil fuel-linked investments may suffer losses due to stranded assets and reputational damage.

“However, climate change could have much broader impacts on funding and investment strategies.

“Not only are assets at risk but also factors such as inflation and longevity which affect the fund’s liabilities.”

The modelling shows that ‘head in the sand’ derives the worst outcome, with the pensions for Camden underfunded by 12 per cent if policy responses from government do not prioritise environmental change, with big corporates continuing with business as usual.

Under the model, GDP growth and returns on equity (in other words, how efficiently companies are handling shareholders’ money) rise in the short term, but then “fall significantly”, interest rates paid on government bonds behave similarly, and inflation also goes up.

Assumptions made in the model include global crop failures and an influx of new diseases, with severe temperature fluctuations resulting in harsh flu epidemics and antibiotic resistance rising, with a limited amount of new technological discoveries.

The ‘challenging times’ scenario also results in underfunding for Camden’s pensions, though not in quite as extreme a way as ‘head in the sand’, with the difference between the fund’s resources and what it would need to pay to its members sitting at -4 per cent.

Under ‘challenging times’, some adaptation to climate change is achieved, though ‘peak oil flow’ is reached, which constrains future economies. Other difficulties assumed to be faced would be increased fuel prices, constrained government finances, and difficulty importing food.

This scenario reflects action being taken, but on a delayed timescale, with GDP growth and equity returns falling “in the medium term”.

The ‘green revolution’ gives the best outcome in Hymans Robertson’s modelling, with inflation rising but then stabilising in the long term, as well as GDP growth and equity returns taking a hit at first, but then improving.

According to the actuaries, a green revolution scenario would see an extra five per cent added to the pension fund, assuming that “rapid technological advances” lead to a positive adaptation to the climate emergency, with healthier lifestyles “prevailing”, diets improving, and homes receiving protection from extreme temperatures.