Pension trustees should be getting to grips with climate change risk, regardless of the size of their schemes warned panellists at the Corporate Adviser ESG Forum earlier this month.
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Stuart O’Brien, a lawyer and partner at Sackers pointed out that there is a raft of new regulations coming in over the next few years, requiring trustees of larger schemes to factor in these risks. These regulations come into force from October this year for schemes of £5bn plus and from October 2022 for schemes of £1bn plus.
O’Brien said:: “Climate risks don’t start at the beginning of October though and certainly don’t care what particular size scheme you are in. If this is risk trustees should look at this applies to trustees of all schemes. Now is the time to start looking at this issue and acting accordingly.”
He points out that the new code of practice from The Pension Regulator also contains a section specifically on climate that does not differentiate on scheme size.
All those attending this panel discussion said they did not believe there was any inherent conflict between a trustee’s fiduciary duty to members and their ability to meet new regulatory requirement on ESG.
Celene Lee, principal and senior investment consultant, Buck pointed out that this should be seen as part of the overall investment decisions trustees have to make. “It is already widely embedded that some ESG factors will have a direct impact on potential investment returns.”
She adds that trustees should not lose sight of wider investment principles. “ESG is just one of the element that feed into the soul of the investment decision-making processes.” But she says decisions shouldn’t be made solely, for example, on these ESG – such as carbon reductions – without taking into account other investment factors.
For example she cited a green fund which during 2020 went up in value by 140 per cent. This year though valuations have fallen by 50 per cent. “Investing in funds like this is pure bubble speculation.
“We can’t just look at one aspect of the ESG, such as the environment, in isolation. Yes, we need to measure it and talk to investors about this factor, but we also need to act sensibly in terms of how we invest.”
Could trustees face legal challenges for not moving fast enough on climate change, or conversely investing in ‘green’ opportunities that did not turn out to deliver investment returns for members?
The delegates on the panel thought there was a fairly low risk legal action. O’Brien says: “Actions against pension trustees for their investment decisions are pretty limited.
“In hindsight what you have to show is that trustees didn’t follow a proper process or they made unreasonable decisions. So the thing that will protect trustees from being sued is that they have informed themselves of all the relevant issues when making an investment decision, and followed the appropriate process.
“I would say this tends towards protection trustees that are more engaged on ESG issues, rather than those who are less engaged.”
Delegates on the panel discussed the challenges of trying to make schemes meet the net zero goals set out in the Paris Agreement on Climate Change.
Cushon is one of the first pension schemes to become net zero. Its founder and CEO Ben Pollard explains that the firm calculated that the average pension pot in the UK emits around 23 tons of CO2 emissions a year.
He says: “Most people don’t think in terms of CO2 emissions, so to translate this figure, it is roughly the same emission you’d get from running nine family cars a year or using 940 patio heaters.”
He says the firm wanted to act to reduce this. As a result Cushon has looked to decarbonise their portfolio and is also used offsetting to achieve a net zero status today — rather than simply aim for a future 2050 goal.
Offsetting can be seen a a somewhat controversial topic when it comes to reducing carbon emissions.Katherine Stoudulka, programme director, Blended Finance Taskforce and SYSTEMIQ says there is difference between going “carbon neutral”, which effectively offsets current emissions and committing to a net zero goal.
“By going carbon neutral, you’re offsetting the carbon you produce. But that’s where where you see a lot of the a lot of the greenwashing. For example someone takes a flight and invests in a renewable energy project to offset the emissions of that flight.
“With net zero there is the active decision to change activity, be it not to take that flight or to decarbonise a portfolio.”
Once this has been done then there are opportunities to use some offsetting she says, but she points out that these offsets aren’t “silver bullets”. Historically, some offset projects have not always been of the highest quality. “It is important to look for high quality offsets. Nature and biodiversity is important. Around 50 per cent of our economy today is reliant on nature, equivalent to around $44trillion dollars of GDP a year.
“If we don’t look at offsets which protectioj biodiversity and also have the social impact associated with deforestation, and proteciton and restoring degraded land we are never going to achieve these goals.
“This isn’t a ‘nice to have’. Offsetting through nature based solutions is not something just for tree huggers, or tree-planters even, it is about reducing risks.”
Stoudulka explained that there was likely to be an increase in ‘carbon accounting’ initiatives over the next 12 to 18 months, which should provide better metrics for investors and pension companies. “We’re also start to see a real writing on the wall moment for those corporates who aren’t getting their act into gear, and for those investors who are ignoring this.”
When it comes to driving change, the panel agreed it was likely to be a combination of offsetting, stewardship, engagement and an element of divestment.
Lee said she thought regulation was also going to increasingly play a part, particularly through financial disclosure in line with the TCFD. While regulation may be introduced across countries, or blocs of countries, the challenge will be dealing with those parts of the world that have less stringent regulation on many of these issues: be it carbon emissions or child labour rules.
Pollard says: “I think when we talk about divestment there is a real difference between divestment and new money. People mix them up because it’s easier to defend not divesting from certain areas. But it’s harder to defend carrying on ploughing money into these activities, and helping support harmful industries.”
He said he would like to see oil companies for example, split, in the same was financial institutions were split into ‘good’ and ‘bad’ banks after the financial crisis. This would give investors the opportunities to invest in the new technologies they are supporting without continuing to fund coal and oil activities.
He says their unwillingness to do this does make him slightly suspicious about some of the green credentials that this firms put forward.