Aligning pension funds and corporate climate ambitions

It is important that trustees understand the climate risks and opportunities within their investment portfolios. There are statutory requirements for large UK pension schemes to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) which includes setting metrics and targets, as well as conducting scenario analysis. While there is a growing level of understanding on these issues, expertise is limited, and the supporting infrastructure is poorly developed.

A useful resource for pension trustees is the government guidance on aligning pension schemes with TCFD recommendations, produced by the Pensions Climate Risk Industry Group.

There is a need for collaboration across pension schemes to encourage systemic change towards decarbonisation and climate risk management. The new legislation has focused industry minds.

There is a clear split between pension fund size and capability of the schemes to address climate related risks.

For smaller schemes, trustees need to apply caution when investing members’ money to ensure they are doing what’s best for them. For funds beneath £1m in value which are outside the scope of the new legislation, members are potentially losing out on the opportunity for their climate risk exposure to be better managed.

Smaller schemes also rely more heavily on input from investment consultants, where there is a need to raise awareness and action on climate governance. Investments are often in pooled funds that need to consider the full business cycle, which makes it harder to change allocations mid-cycle.

Options need to be explored for smaller schemes to act within the scope of their own resources. Access to more free, high quality, resources and initiatives will help.

When considering how to translate net zero commitments into the investment portfolio, should pension schemes divest of carbon intensive (eg oil and gas) companies? Or is it better to hold the investment and influence the transition plans of those companies?

In the context of pension scheme investments, it is difficult to abandon carbon intensive companies as they hold significant amounts of capital. Instead, trustees can engage to deploy capital away from carbon intensive activity (eg oil and gas exploration) and towards zero carbon investment (eg renewable energy).

For trustees choosing to engage rather than divest, this commitment requires a full engagement plan that includes scrutinisation of transition plans and escalation where necessary. There is a limited timeframe to transition carbon intensive companies, and no time to waste on greenwash or unproven technologies such as carbon capture at scale. Trustees need to ask important questions about whether these companies really can transition.

There is an interesting parallel to consider between the corporate sector and the pensions sector. While shareholders play an accountability role for corporates, it is less clear who plays this scrutinising role for the pensions sector. NGOs can play a useful role in helping to independently assess the quality of climate risk disclosure by pension schemes.

There is a clear need for increased education of pension trustees on climate governance issues. There is currently no standard education on ESG issues. It is also important to showcase success stories to help people understand what needs to be done.

To make informed choices, it is important that pension trustees understand what their members would like to happen. ESG attitude surveys show members increasingly want to see more action on sustainability. Trustees are sensitive to pressure. Campaigns such as ‘Make my money matter’ are helping raise awareness and drive change; as well as the prospect of legal action as seen with the McVeigh vs REST case in Australia.

Investors can act now to develop ways to measure climate risk within their portfolios. These portfolios can then be pushed to a better position over time, and data will improve; but it is important to act now.

A successful net zero transition for pensions also requires strong government policy to provide a longer-term framework against which companies can plan. An indication within this framework of future carbon pricing levels will be hugely beneficial in supporting and accelerating this transition.

This should not be a competitive process where different pension schemes are trying to outclass one another. We all benefit from the system moving together and there is a real opportunity to bring to life some of the success stories and best practice examples of how to accelerate change.

Here is further information on the Pension Schemes Act climate disclosure requirements, and supporting tools for action:

The Centre for Climate Engagement has prepared a briefing note on the new legislation on climate governance and reporting requirements for occupational pension schemes

Pension Schemes Act 2021, the original legislation, as it was enacted

The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 – coming into force on 1st October 2021

Governance and reporting of climate change risk: guidance for trustees of occupational schemes – GOV.UK

Net Zero Top Tips for Pension Scheme Trustees