The ‘changing nature’ of DC investments

The estimated $4 trillion annual funding gap to achieve the United Nations Sustainable Development Goals (UN SDGs) by 2030[1] presents a formidable challenge, but it also creates a compelling opportunity for innovative blended financial solutions. 

We believe DC pension schemes and responsible investment strategies can – and are – playing a critical role in bridging this gap.

The UN SDGs funding gap exists alongside a $700 billion per annum funding gap[2] to achieve the Global Biodiversity Framework 2030 targets.

With DC assets accounting for 59% of total global pension assets (based on the seven largest pension markets in 2024)[3], they represent a significant pool of long-term capital. 

The emerging opportunity 

More than half of the $4 trillion annual funding gap relates to developing countries’ energy investment needs, estimated at $2.2 trillion per year. Emerging markets in particular need to seek alternative forms of financing to reach the UN SDGs.

This can include leveraging innovative financing methods that benefit from credit enhancement through multilateral guarantees and insurance[4], such as use of proceeds bonds, debt conversion bonds, and outcome bonds.

Debt conversions for nature are an example of such alternative financing options. These allow sovereigns to refinance their debt at more favourable rates, with proceeds being put towards supporting conservation initiatives.  

A recent example of such a transaction is being led by the Republic of Ecuador and The Nature Conservancy and is the first of its kind to support forestry and freshwater conservation. 

The partnership should provide significant gross savings over the life of the transaction, unlocking around $460 million to facilitate the Biocorridor Amazónico program, which aims to protect 4.6 million hectares of forest and 18,000km of freshwater, as well as benefitting indigenous populations and communities[5].

Exposure to a fast-growing market for DC savers

We believe DC investments can help bridge the financing gap by offering members exposure to this fast-growing and impactful part of the global debt market. 

It’s a great example of the increasingly diverse range of assets that DC schemes can invest in. It combines the need to unlock financing where it is often most needed, with the aim of delivering positive returns for members in retirement, as well as supporting critical nature and social outcomes.

In our view, the scale of opportunity in closing the emerging markets funding gap is not just for impact investors, it is a proposition that has moved into the mainstream. 

With over half of the world’s GDP moderately or highly dependent on nature[6], the need to support the world’s ecosystems is more pressing than ever.

Interested in reading more about DC pensions and investments? You can find our latest content on our designated DC blog page. 

 

All data is from L&G as at 24 March 2025 unless stated otherwise.

1 UN Trade & Development (UNCTAD): Investment policies for the energy transition: Incentives and disincentives

2 Biodiversity Finance Trends 2024 - GOV.UK

3 Global Pension Assets Study - 2024 - Thinking Ahead Institute

4 Multilateral guarantees and insurance insure the credit risk of the EM country and elevates the credit rating broadly in line with the guarantor – providing the opportunity to invest in emerging markets with investment-grade credit risk.

5 The Nature Conservancy, December 2024.

6 PwC: Managing nature risks: From understanding to action.

 

Important information

While we have integrated Environmental, Social, and Governance (ESG) considerations into our investment decision-making and stewardship practices, this does not guarantee the achievement of responsible investing goals within funds that do not include specific ESG goals within our objectives.

Key risks 

It should be noted that diversification is no guarantee against a loss in a declining market.

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested.

The risks associated with each fund or investment strategy should be read and understood before making any investment decisions. Further information on the risks of investing is available from L&G's Fund Centres.