How are net-zero commitments changing the workplace pensions landscape?
Over the past 12 months there has been a significant increase in the number of companies making a commitment to be net zero by 2050 — a key part of the Paris Agreement to limit global temperature increases and tackle climate change.
We are hugely supportive of these commitments, but high-level net zero commitments are only the first step. This year we expect to see more companies publish details of how these goals will be achieved. This is likely to include information on interim targets. Consensus is growing around the need to cut carbon emissions by 50 per cent by 2030, when compared to 2019 levels, to ensure fund managers and pension providers remain on a Paris-aligned trajectory.
At L&G we are aiming to go further, and have already set stretching 2025 targets. L&G’s master trust is working with its fund managers to put in put in place plans to reduce emissions without altering or compromising our overall objectives of delivering long-term returns and good retirement outcomes for members.
What role do other assets have when it comes to ESG integration?
To date much of the discussion around ESG issues, particularly in the DC sector, has focused on listed equities. But we need to think about ESG across all asset classes. It doesn’t make any sense to adhere to strict ESG guidelines for equity portfolios but not take these factors into account when investing in corporate bonds, sovereign debt, infrastructure or real estate. The bond market, for example, is much larger globally than equity markets, and when it comes to stewardship and engagement L&G can play a big role with corporations that are major bond issuers, raising concerns about corporate practices in the same way we do at shareholder meetings.
There will be specific ESG challenges to look at across these different asset classes. But, for example, L&G has a DC Sustainable Property Fund which has an ambitious target to be net zero operational carbon emissions by 2030. We think these challenges can be met.
How have recent ESG regulatory requirements impacted clients?
There has been a sea change in how clients look at ESG issues. A few years ago these were peripheral conversations – now they are a central part of any discussion we have. It is clear ESG investment, particularly in relation to climate change, is an issue all pension schemes need to address.
The Task-force on Climate-Related Financial Disclosures has been particularly important in driving this change, with schemes larger than £5bn due to make climate-related disclosures this year, and those with assets of £1bn or more needing to make these disclosures in the next reporting year.
These requirements have helped clients think about the approach they want to take: do they want to do more than just the basics regarding ESG and climate change? What sort of pension offering do they want to offer members? These various regulations now mean climate-related data published at a company level is much better. Over the next few years we would like to see better data and better reporting on a whole range of ESG issues, be it biodiversity, racial equity, or better governance.
What are you doing to keep scheme members informed about ESG — and how do you allow them to have a voice on the issues that matter to them?
Getting members more engaged with their pension helps drive better retirement outcomes — and communicating about ESG can be an effective way to do this. People often are far more passionate about issues like climate change than they are about pensions!
Last year we set up our Member Advisory Panel, one of the first across the industry. Here members are invited to meetings to discuss key issues and initiatives around pensions, including ESG.
We have also recently had our first annual member forum, which was an online session viewed by almost 17,000 members. Some people wanted to learn more about the
basics of pensions and what ESG means in practical terms, but there were also a lot of super-engaged members who wanted to have very in-depth discussions about our approach to sustainability.
We are also integrating services like Tumelo, which gives members more information about where their pension is invested, and details of forthcoming votes, particularly on important ESG issues. This service allows members to express a wish on how fund managers should vote on these shareholder resolutions. The feedback we get from this service helps inform the voting intentions of our stewardship teams. This is a virtuous circle, with the stewardship team providing more commentary on the voting decisions they have gone on to make.