Pension scheme trustees have the ability to influence the investment of huge pools of capital, whether that is by making investment decisions for a Defined Benefit (DB) pension scheme, or selecting funds for members to choose (or default into) in Defined Contribution (DC) arrangements.
One of the greatest challenges of our time is climate change. For some years now, governments and financial regulators have been legislating to address this challenge. The economic impact on companies – both of climate change itself and of changing environmental regulation – is very real.
The extent to which pension schemes focus on climate change-related issues will differ from scheme to scheme, and will be dependent on a scheme’s individual circumstances. However, climate change – and the legal and regulatory
responses to it - pose new challenges and opportunities for pension scheme investing. Understanding and managing these risks appropriately is, therefore, key for investors, such as pension schemes, to effectively meet their duties.
Due to the combined weight of money that they manage on a dayto- day basis, asset managers have a critical role to play in ensuring that companies are appropriately addressing climate issues that they face. Managers who are able to mitigate the risks and capture the opportunities associated with climate change will be best placed to help address, and capitalise on, this challenge.
Whilst progress to date on climate issues has been meaningful across many countries and industries, further improvement could be made if more managers are encouraged to move away from boxticking and are instead encouraged to start difficult conversations with companies regarding their climate-related performance. These conversations should happen not just in respect of assets managed in Environmental, Social and Governance (ESG) - or climate-focused funds, but in all funds, and across the range of asset classes – not just equities.
One way in which managers can help make a positive change is to push for better transparency on issuers’ carbon data. Higher quality data will allow managers to better understand the financial impact climate-related risks and opportunities have on a company.
Whilst climate-related data availability and consistency has been a persistent issue, we are hopeful that progress will be made as more firms seek to enhance their disclosure procedures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.
Similarly, pension schemes must also now provide greater transparency, for example, around their own stewardship policies under the Shareholder Rights Directive II (SRD II) legislation.
Whilst we believe that there is much more that the investment community can do on climate issues, we are cognisant that progress will not be made overnight, and so we must expect a long haul with plenty of lessons to be learned along the way.
Challenging managers on their actions will be one important mechanism for mitigating climate risks and benefiting from climate related opportunities – and ultimately creating a better future for people to spend their hard-earned retirement savings in.
Last update: 8 April 2021