Pension schemes are looking to refine responsible investment remits against an evolving political and economic backdrop.
This was the subject of a key panel discussion at Corporate Adviser’s Master Trust and GPP Conference today.
The three experts on the panel agreed that UK pension schemes had not materially diluted their climate and sustainability commitments. Isio’s head of sustainable investment, Cadi Thomas, said: “We’ve not seen any scheme backtrack on their ambition or commitments when it comes to ESG.”
Thomas added that there was, however, greater scrutiny from some trustees, particularly given the relative underperformance of some ESG strategies in recent years.
Oscar Warwick Thompson, head of policy and regulatory affairs at the UK Sustainable Investment and Finance Association (UKSIF), said this was largely due to broad support for these aims from UK pension savers. The political backlash seen in the US on ESG issues had not filtered into wider consumer perceptions around investing in the UK, he said. He pointed to recent UKSIF polling, commissioned from YouGov, showing that 79 per cent of Britons support their pensions being invested in renewable energy, including 53 per cent of Reform UK voters.
However, the panel agreed that the approach had changed in some cases, as had the metrics being used to measure progress against key ESG targets.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said that there was an evolving view when it came to investment in sectors such as fossil fuels, nuclear energy and defence.
Bioy pointed out that new EU SFDR fund classifications will mean that ‘transition funds’ (broadly in line with the former Article 8 classification) will bar investments in companies expanding fossil fuel production. Meanwhile, the ‘sustainable’ fund classification (aligned with the former Article 9) will not permit fossil fuel exposure.
Thomas added: “The picture is now a lot clearer on what the worst offenders look like,” and said that there is growing pressure to divest from these particular companies.
Warwick Thompson noted that this issue has also highlighted the limits of shareholder stewardship activity, with some companies not engaging with shareholders or starting to row back from previous climate commitments.
The filters applied may also have changed, with the panel discussing the debates arising around defence stocks. Some schemes and funds have looked to review exposure to this sector, particularly in light of the war in Ukraine.
However, Thomas pointed out that conflict in the Middle East has also resulted in pressure groups petitioning schemes to divest from the sector entirely. She added that due diligence is important, but it can be harder to differentiate between companies in this sector and how the armaments they produce are ultimately used.
“It’s important to review the sector from a strategic point of view, rather than reacting to singular events, as you may otherwise have a policy that needs to be revisited when the next conflict occurs a few years down the line.”
Warwick Thompson referenced UKSIF’s work with the think tank RUSI, which showed that ESG investment strategies were not preventing financing flowing to UK defence companies. He said it was important to ensure a nuanced approach that respects international law but also recognises legitimate security needs.
The panel also discussed the divergence between US and UK/European asset managers on ESG issues. Bioy pointed out that US managers are under considerable pressure from domestic regulation and policymaking, particularly under a Trump administration that is actively seeking to undermine decarbonisation strategies and policies.
Thomas said this divergence has made it easier to identify which asset managers actively support stewardship activity for longer-term impact, and which have taken a more ‘tick-box’ approach.
Schemes are also evolving the way they measure progress against a whole series of ESG targets and goals.
Thomas said there was a shift towards more forward-looking metrics, be it implied temperature rise or the proportion of investee companies with transition plans in place.
As she pointed out, carbon-footprint figures can be reduced simply by pivoting away from certain firms or sectors — but this does not necessarily affect real-world emissions.
However, all agreed that net-zero targets remain important. “They show ambition and encourage accountability,” said Bioy.
Thomas added that there was a move to extend ESG reporting beyond climate. “We are also seeing an increased focus on social metrics and a move towards nature and biodiversity reporting via TNFD,” she said. However, she added that widespread adoption of TNFD reporting, modelled on TCFD, was still a few years away.
Warwick Thompson said it was important that pension schemes and the industry more generally consider how these metrics and this information are communicated to members. “At the moment it is not really resonating. There is perhaps a role for regulators here to ensure this information is delivered in a more digestible form to the end user — the pension member.”
The panel agreed that despite US defunding of decarbonisation programmes, DEI coming under attack, the underperformance of many sustainable investment strategies, and climate reporting being in a state of flux, responsible investment strategies still have an important role to play in the UK DC sector and will continue to evolve to reflect member concerns and priorities.
