Amid the tumultuous events of the past 12 months, pension fund managers may be forgiven for overlooking the commitments made at the delayed COP26 meeting in Glasgow and at Egypt’s COP27. Yet the battle against climate change continues to escalate, and the stakes get ever higher.
Pledges to tackle climate change have been made by corporate pension schemes but are they delivering?
And is the industry that exists to help them meet investment and sustainability goals stepping up to the plate?
For Jennifer O’Neill, associate partner at Aon, COP26 crystallised the scale of the task in many ways, but it also marked the next stage of a long journey.
“The establishment of collaborative financial sector initiatives, such as Glasgow Financial Alliance for Net Zero (GFANZ), means that there is greater appetite and clarity of objective – although attaining that objective is not without challenge,” says O’Neill.
Over the past five years, the question around sustainability and its various elements has generally shifted from “why” to “how”, but this, too, has raised as many questions as it has answered.
“We’re noticing gaps between the intent and the delivery,” says Sarah Wilson, CEO of sustainability data specialist and advisory Minerva. “There are a lot of frustrated ESG people trying to do their level best, but are just not being given the right resources to do what’s needed.”
Wilson says the reality of the situation, and the difficulty of the ask, is now sinking in on those who need to manage, implement and measure success.
“Pension funds and their managers are in desperate need of better resourcing across the piece: data, system and informed insight,” says Wilson. “NGOs have raised numerous red flags over greenwashing, and with good reason. We’re back to the old IT saying of ‘GIGO: garbage in, garbage out’.”
This is one of the key issues in targeting sustainability for corporate pension managers. Data – the cornerstone for all financial services – is still lacking standardisation, if the information is even presented at all.
Since the meeting in Glasgow, the European Union has also proposed ESG disclosures as part of its Corporate Sustainability Reporting Directive, while the International Sustainability Standards Board, created at the COP26 itself, has been mandated to issue sustainability reporting standards to establish a disclosure model that meets capital market needs.
Trying to turn the corner
Even in the US, which lags Europe and the UK on sustainability efforts, the regulator has moved to improve and standardise disclosure. In a speech in London on October 17, SEC Commissioner Jaime Lizárraga announced plans to “help facilitate comparable ESG disclosures and focus on ensuring statements made to investors are not false or misleading”.
He noted that “investors with $130 trillion in assets under management have requested that companies disclose their climate risks”, adding that “analysis by the Network for Greening the Financial System estimated that, under current policy pathways, climate change could reduce US GDP by 3 to 10 per cent by the end of this century”.
Despite less-than-perfect data, the UK government has already enacted legislation on climate change responsibility and now many pension funds are required by law to report their carbon emissions. Since October 2021, the rule has applied to funds managing more than £5bn in members’ assets. And since October 2022, the rule has drawn in those with more than £1bn.
With around £18bn in member assets, The People’s Pension published its first report last month. The obligation to do so, according to Leanne Clements, head of responsible investing for People’s Partnership, its underlying provider, is a positive step forward for the investment industry.
“At this early stage, there is an acceptance that the industry is still learning and collaborating on how best to carry out decision-useful analysis,” says Clements. “There is a belief that the data availability and methodologies used for scenario analysis will improve rapidly as the industry progresses from this first reporting period.”
Aon’s O’Neill agrees, noting how mandatory climate reporting even for just the very largest in the sector has prompted pension fund decision-makers to devote more time and attention to this critical issue. With the first Task Force on Climate-Related Financial Disclosures (TCFD) reports starting to be published, we are seeing schemes’ tonnes of carbon per £1m invested being reported.
“Without a mandatory regime, this would be less prominent on many funds’ agendas,” O’Neill says. “We now need to ensure that the intention of the regulations mandating this is followed:
that these discussions and analysis informs actions and steers funds to a more sustainable position.”
A net-zero path for all?
But to what end is all this reporting if not a net-zero target? And, with significant profits still being earned by companies earning their revenues from mining, fossil fuels and other large polluters, should it even be the path for investors?
Stuart O’Brien, partner, Sackers, which was one of the first UK law firms to issue guidance for trustees and corporate pension managers around TCFD disclosure requirements, says the industry could be moving towards a nationwide requirement on an ultimate net-zero goal.
“To date, the government has steered away from imposing mandatory net-zero targets on pension schemes, and although the Climate Change Governance and Reporting Regulations require reporting of portfolio emissions and, from this year, portfolio alignment to the Paris Agreement, they do not currently require a net-zero target,” he says.
However, net zero, which has become a common target for asset managers, consultants and plenty of other financial services providers, is quickly becoming a standard for trustees of larger schemes.
All master trusts and GPP providers have a net-zero target, of 2050 or earlier, with 50 per cent reductions by 2030 pledged by all multi-employer DC schemes. And many single-employer trust-based DC arrangements have publicly committed to net zero, something that The Pensions Regulator has openly commended, according to O’Brien. He believes that, longer term, it could conceivably become a regulatory requirement.
“In 2020, when the Pensions Bill was being debated in parliament, amendments were proposed by opposition peers and MPs that would have required trustees specifically to take account of the Paris Agreement in their investment strategies,” says O’Brien.
Ultimately, the proposed amendments to the legislation were defeated by the government benches, so did not make it into the final legislation.
“However, 256 MPs across the opposition benches backed the change,” notes O’Brien. “Were we to have a change of government in the future, the point could well be reopened.”
Given recent events in Westminster, a change of government may well be on the cards, but any significant movement on reporting requirements would still need the support – and ultimately product and solution design – from the pension and investment sector to be successfully adopted by companies offering a range of retirement benefits.
“Implementing a net-zero target needs thought and care,” says Aon’s O’Neill. While many DB pension funds – despite recent market events – may be better-funded than ever and are shortening their time horizons before transferral of liabilities to an insurer, it is not the case for many open corporate schemes, which have very long-time horizons.
For O’Neill, like many others, net zero is likely to become an imperative, both to capture the enormous investment opportunity of the transition to a low-carbon economy to mitigate the physical and transition risks associated with climate change.
“We believe that more concerted action is needed across the industry to move together in achieving positive outcomes for both people and planet. This includes pension fund members, whose retirement savings are stewarded by pension fund decision makers and the asset managers they appoint,” concludes O’Neill.
