The Pensions and Lifetime Savings Association (PLSA) has called for a “system-wide approach” to addressing ‘climate-aware’ investing barriers, outlining seven key recommendations.

Following a series of industry roundtables, which involved 80 delegates representing more than 60 funds directly, the PLSA emphasised that whilst there was a “universal appetite” amongst schemes and service providers to take climate change seriously, and invest “with a sense that a carbon-constrained future is coming”, several barriers continue to limit industry action.

In particular, the association highlighted an “immature infrastructure” surrounding climate-aware investing, such as inconsistent definitions and language, as well as limited or poor quality data or lack of investment products with a full range of necessary characteristics, as two key barriers.

In addition to this, other challenges were also highlighted around the limited expertise and training on climate change issues across the investment chain, including amongst senior decision makers at pension schemes.

Furthermore, concerns around the structural challenges in the investment change and a need for better alignment of duties and disclosures was also identified as further obstacles facing investors.

However, the PLSA stressed that pensions schemes alone cannot resolve these issues if they are to “deliver the change that is necessary”, stressing that a system-wide approach is needed.

Considering this, the association has outlined seven recommendations to address the barriers identified via the roundtables, such as the agreement of a standardised definition of 'climate aware'.

The report emphasised that the industry has previously recognised that this lack of definition as an issue, prompting the creation of several different initiatives set up to try and agree definitions.

However, it warned that having so many initiatives with this purpose risks creating an “increasingly dense ‘alphabet soup’ that could inadvertently exacerbate the confusion.

Considering this, the PLSA has recommended the creation a joint-industry/government review to examine the competing standards and definitions in order to achieve a common language ahead of COP26.

The PLSA has also encouraged the government and regulators to move towards widespread adoption of the taskforce for climate-related financial disclosures (TCFD) recommendations, as well as greater industry-led training and education.

In addition to this, the association has committed to further developing its own guidance for members on what good practice expectations out to be with regard to stewardship services, and to work with the industry and regulators to find solutions to the challenges schemes face when exercising voting rights in pooled funds.

The report explained that, during the roundtable sessions, particular concerns had arose for pension funds with regard to the votes attached to holdings within pooled funds, with a "growing sense of frustration" among PLSA fund members in regard to their ability to influence voting practices in such arrangements.

"With around 39 per cent of private sector UK scheme assets invested in pooled fund, and the majority of DC assets this is no narrow interest", it stated, noting however, that the economies of scale may mean this is particularly an issue for smaller funds.

The PLSA also announced plans to explore the feasibility of creating a pension quality mark for ESG, building on its previous work on implementation statements to consider how best to support members in their communications.

Commenting on the recommendations, PLSA chair, Richard Butcher, stated: “Climate change is a massive issue and the pensions industry has the opportunity to help mitigate its impact by investing in a climate-aware way.

“This report highlights some of the barriers to climate aware investing – none of which are insurmountable – and proposes some actions to overcome them.

“We’ve spent a great deal of time talking to all parts of the pension investment chain about these barriers and, while some pension schemes are already taking a proactive and leading position on the subject, there is a genuine appetite throughout to address them and do more.

“The PLSA is here to help the pensions industry overcome the barriers and to work with others in the investment chain to deliver the essential changes.”

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