Understanding motivations 'crucial' in agreeing divestment approach for pension schemes

Pension scheme trustees have been urged to consider their motivation and ultimate objectives when approaching divestment, after research from Aon concluded that divestment is “not a binary issue”.

The report, The Divestment Dilemma, emphasised that understanding what the ultimate objective is will influence action taken, suggesting that seeking to support the transition to a low-carbon economy demands effective engagement with investee assets to promote and effect these changes.

In contrast, some investors may feel that the risks of holding assets that are at risk from broader structural trends, such as stranded asset risk, may be too great to bear.

“The impetus for action will influence the implementation of any portfolio changes, focal points, and monitoring," the report stated. "Defining these clearly from the outset will also be instrumental in communicating actions and outcomes to stakeholders."

In particular, Aon recommended that pension scheme trustees review and asses their climate risk strategy in light of the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and, with help from consultants, consider if implementing an alternative strategy would allow them to achieve their objectives more effectively.

Climate risk strategy and stakeholder management were also raised as key areas to consider, as the report noted that many trustee boards are considering their fossil fuel assets amid reputational concern and increasing queries from stakeholders.

“Considering how to balance these stakeholder management perspectives with the trustees’ own beliefs, objectives, and implementation decisions should therefore be determined thoughtfully," it said.

“Agreeing and implementing a robust approach is crucial in helping trustee boards articulate this to stakeholders.

“Member communications and transparency around trustees’ activities is an important component to this, alongside constructive and open dialogue with sponsoring employers where there is desire to understand the trustees’ approach in more detail.”

Aon also suggested that the need for pension schemes to disclose publicly and be transparent over their processes for considering these risks is likely to result in greater external scrutiny.

In light of this, it urged trustees to think carefully about these matters and develop a robust policy and approach.

Aon associate partner, Jennifer O’Neill, commented: “Divestment is not a binary issue. As with any strategic investment decision, understanding the ultimate objective and a scheme’s priorities, influences and perception of risk, will impact the ability to make better decisions.

“With increasing expectations from regulators for greater transparency and with scheme members seeking to understand the approach taken by trustees to mitigate climate risk, many UK pension schemes have already committed to a range of divestment, engagement or hybrid approaches.

“Divestment should now be considered as part of a scheme’s overall climate risk approach - which is broader than just reviewing their investment in fossil fuels.

“With this paper, we have aimed to explore the issues that are now emerging, while also outlining some guidance and potential courses of action that can enable schemes to address them as part of their overall responsible investment approach and as they continue to navigate the volatility of climate risk.”

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