By Mercy Gakii Muthuuri
Climate change is increasingly becoming an important issue for African pension schemes. As global temperatures rise and extreme weather events become more frequent, the schemes face the risk of significant financial losses due to the negative impacts on their investment portfolios.
This reality is likely to affect not only a few segments of the population with retirement plans but also extend to those who remain outside the formal pension coverage. Currently, only 15% of Africans have pension coverage, this is far below the global average of 54%. Pension schemes are facing financial losses due to the impacts of climate change on their members. Extreme weather conditions such as floods and droughts have led to massive loss of income and assets for many people on the continent. This makes it difficult for members to meet their basic financial obligations, including meeting their contributions to the pension scheme.
Another risk for pension schemes is the potential for physical damage to the assets they invest in, such as infrastructure, real estate, and other property. This can lead to reduced returns on investment and increased costs for repairs and maintenance. To make matters worse, climate change can leave some assets stranded. this is likely to occur when an asset becomes worthless due to changes in regulations or market conditions related to climate change. For example, coal mines and oil fields become uneconomical to operate as the world shifts towards renewable energy sources.
Despite these risks, there are some opportunities for pension schemes if they take a proactive approach to addressing climate change and environmental sustainability. One such opportunity is to invest in sustainable ventures such as renewable energy and other low-carbon technologies. It is commendable that pensions regulators such as Retirement Benefits Authority in Kenya have opened investment classes for schemes to include non-traditional classes such as infrastructure and private equity. This gives pension schemes a wider array of sectors and projects they can venture into including climate-friendly businesses. These can generate returns while also reducing a scheme’s carbon footprint.
There is also another opportunity to engage with companies in which the pension schemes invest, and encourage them to adopt sustainable business practices and disclose information on their environmental, social, and governance (ESG) performance. This gives the wider businesses in the economy the chance to deploy innovative investment strategies, such as impact investing, to generate returns while also addressing social and environmental issues.
So as much as the pension schemes in Africa are exposed to the financial risks of physical damage, stranded assets, and impact on their members’ contributions, there is an opportunity for them to take a proactive approach that can protect their assets and members and also contribute to the sustainable development of their respective economies and society.
The writer is a Pensions Consultant & climate adaptation finance expert. She can be reached through [email protected]
Read: Kenyan Pension Funds Looking To Intensify Investments In Alternative Assets In 2023
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