Institutional Asset Manager Newsletter 07.03.25

Fossil fuel exposure threatens UK pension funds

In a rather unfortunate coincidence that within days of BP announcing it would slash planned investment in renewable energy and increase annual oil and gas spending to USD10 billion, an industry report reveals that global economic exposure to fossil fuel asset stranding risk amounts to USD2.28 trillion by 2040.
BP claims that the shift in strategy is aimed at boosting earnings and investor confidence, but achieving the latter seems a little ambitious, especially among UK pension funds that are predicted to lose USD19 billion in the next 15 years thanks to their exposure to fossil fuels.
Research from the UK Sustainable Investment and Finance Association (UKSIF) and Transition Risk Exeter (TREX), warns of the accelerating risk of investment in oil, gas and coal producers, noting that the UK is particularly at risk.
Dr Phil Holden, Senior Lecturer in Earth Systems Science at The Open University, says: "Global fossil fuel stranding risk has almost doubled from USD1.4 trillion to USD2.28 trillion over the last five years. This problem is becoming worse by the week. Oil and gas exploration may appear attractive in the short run, but the longer extraction remains misaligned with the global decarbonisation trajectory, the more dramatic the economic realignment needed."
Ultimately it is short-termism from company directors that leaves investors – especially those with a long investment horizon - vulnerable. Shareholders will need to reapply pressure to companies in the fossil fuel sector if they stand any hope of turning the tankers round in favour of renewable alternatives.
In the meantime, investors could do well to look at private markets which will provide funding for among other things, renewable energy projects.
The latest Morningstar European Asset Manager Pulse reveals that real estate, infrastructure and renewable energy investments are booming, fuelled by sustainability initiatives, digital transformation, and increasing demand for data centres.
This leads Johann Scholtz, Senior Equity Analyst at Morningstar, to note that "forward-looking players who act now are well-placed to capture untapped growth".
"The dynamics within Europe’s asset management industry are undergoing a profound shift. An increasing focus on private markets, coupled with the rising dominance of megafunds and the urgency to address pension shortfalls, creates opportunities for firms to strengthen their competitive positioning."
And asset managers could do worse than consider moving into the semi-liquid space to tap into investors who have been unable to lock into the long-term commitment associated with private market investment.
Bfinance’s semi-liquid private equity market report reveals the sector has grown to more than 40 strategies with an estimated USD30 billion in assets under management (AUM), many of which were launched since 2020.
And as the regulatory environment becomes more accommodating to semi-liquid funds – see long-term asset funds in the UK and Europe – this market looks set to flourish.
We also spoke to Archana Jahagirdar founder and managing partner of Indian venture capital firm, Rukam Capital. India is enjoying steady growth, she says, as changing demographics trickle down through the country which is set to be the third largest economy by 2030."

Gill Wadsworth, Editor, Institutional Asset Manager
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