PART 2 – Pensions & Climate Change “Taking the Temperature”

23 / 09 / 2021

As we reported in our July 2021 Pensions Compass, the UK is ramping up the regulatory framework with regards to climate change and how trustees of occupational pension schemes should engage with, and report on climate change risk in relation to their duties. Whilst only the very largest schemes will need to comply by 1 October 2021, smaller schemes will undoubtedly have to follow suit over the coming years.

However, more generally and as Clive reported in our July 2021 Compass, the ‘green‘ movement is taking hold within the pensions industry in many different guises:

  • pressure from Government on pension schemes (as institutional investors) to bring Environmental, Social and Governance (“ESG”) factors to the fore when setting investment strategies and agreeing Statements of Investment Principles for their schemes ;
  • the Chancellor’s vision to establish the UK as a global leader in green finance and the launch of the Government’s “Green Gilts”  in order to finance projects with clear environmental benefits for the UK – reports on 21 September 2021 suggest that investors placed nearly £100bn in orders for the inaugural 2033 green gilt;
  • the establishment of high profile campaigns such as Make My Money Matter (co-founded by Richard Curtis of Blackadder and Love Actually fame) which amongst other things has created the world’s first Green Pension Charter aimed at “turbocharging” the impact pensions can have on the environment by diverting some of the £2.6 trillion of assets circulating in UK based pension funds towards sustainability and creating a net zero carbon society by 2050 at the absolute latest (Sign the world’s first Green Pensions Charter – Make My Money Matter);
  • dedicated independent financial advisers and fund managers who are specialising in ethical investment designed to promote a sustainable, net-zero carbon future – targeted sectors include education, healthcare, reforestation, green technologies and clean energy; and
  • the introduction of the Pension Regulator’s strategic response to climate change.

Change for the better?

Changing how we invest for our retirement makes eminent sense not least because we want the  environment of the future to be healthy, clean and sustainable in order that we may enjoy the fruits of our labours to the fullest extent possible. A blatantly selfish statement perhaps but a simple message at the heart of generating change – there is no denying that the “Climate Crisis” is very real and changing mindsets and harnessing some of the £2.6tn of UK pension assets to create a better future seems like a no brainer.

Only the beginning

However, whilst the bullet points listed above demonstrate positive engagement from key stakeholders we are still very much at the infancy of pension schemes reaching their full potential in terms of driving environment change. For instance, whilst trustees and fund managers are legally required to consider ESG factors there is no universal standards that pension schemes have to follow.  

Separately, whilst sustainable funds and ethical investing has had a purple patch recently, big oil and gas producers are now enjoying boom times again. As Clive’s July 2021 Compass articles explains, trustee duties have evolved over the past century so that chasing generous investment returns probably outweighs ESG, ethical investment or anything else for that matter. With UK final salary schemes still facing significant deficits, can trustees legitimately miss out on the benefits of short term supply and demand?

In our opinion there also needs to be collaboration amongst the rating agencies and those companies running stock market indices so that as much uniformity as possible is introduced into the models and methodology for scoring companies on their ESG compliance.

Hopefully we are at the tail end of a global pandemic, the severity of which in terms of the impact on human life and personal sacrifice is unprecedented in modern times. The catastrophic consequences of COVID 19 could not have been predicted 24 months ago – to many it was the stuff of science fiction which seems to have been halted by Government intervention and modern medicine in the form of vaccines. The risks posed by climate change, whilst perhaps hard to fathom, are building and urgent, combined action is needed in all quarters of society in order to reverse a catastrophe that has already started to build. It seems to us that the pensions industry can play a significant role in this non-fiction reality.