Just 5 per cent of corporate pension funds in the UK have a specific climate change policy, despite 74 per cent of funds admitting that they recognise the potential impact of climate change.
Pinsent Masons analysed the top 43 UK corporate pension funds, with a total of £479bn assets under management. It also founds that just 12 per cent have a metric for measuring the sustainability of their investments. None of the funds have targets for investment in low carbon, energy efficient or other sustainable assets and none have a decarbonisation target.
However, Pinsent Masons said that several funds are creating metrics to measure climate change related indicators. Some funds are also actively monitoring the environmental impact of their investment decisions.
For example, the Strathclyde Pension Fund is carrying out its first carbon foot-printing of listed equity in 2016. This exercise was repeated in 2018 and expanded to include an emissions audit. The BBC Pension Scheme is participating in a carbon footprinting exercise to assess the emissions produced by the scheme’s equity holdings, and the South Yorkshire Pension Fund is conducting a carbon audit highlighting companies across their portfolio for their carbon risk strategy.
Furthermore, the West Midlands Pension Fund is actively reviewing the use of carbon footprinting and ‘green exposure’ metrics, and the Universities Superannuation Scheme is ensuring it is ‘underweight’ in carbon investments. The Railways Pension Scheme is commissioning a study to provide the emissions data for both passive and active elements of its portfolio to gain a clearer understanding of the scheme's carbon exposure.
Where climate change could materially prejudice investment returns, trustees have a fiduciary duty to take account of these risks. Potential risks include the physical risks from actual changes in climate, such as severe weather patterns which impact real estate and agriculture, as well as the risk of changes in government policies, which can often be abrupt and radical.
In September the Department for Work and Pensions confirmed its intention to introduce new regulations requiring trustees to be more transparent about their approach to ESG factors. In practice this means that trustees must: explain how they take account of ESG considerations, including climate risk, in their investment strategy; explain what they do to influence the firms in which they invest through their stewardship activities; and, in the case of DC schemes, publish this information on a website accessible to their members and the general public.
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Pinsent Masons partner and head of pensions and long-term savings, Carolyn Saunders, said: ''It has been apparent for some time that climate change issues can affect financial returns. However, in the absence of a standardized approach to climate risk management in investments, most trustees are unsure how best to deal with the issue.”
“Clarity about trustee duties with regard to climate change is a priority. The new regulations will make it clear that sustainability is a relevant consideration for all trustees, whatever their personal views or their ability to influence the businesses in which they invest. It is helpful that the government has acknowledged that stewardship activities are likely to be more limited in smaller schemes.”
“Trustees now need to decide how best they can discharge their duties in this area. For those who have not yet engaged with this area, the starting point is to assess the extent, if at all, to which their investment consultants and/or asset managers are currently taking account of ESG factors."