Carbon-conscious schemes rally for strategic climate change response

Earlier this year, debate on socially responsible investing was ratcheted up when 14 high-profile UK schemes – including BT Pension Scheme and Universities Superannuation Scheme – collaborated on an SRI guide for managers.

Last week at a panel discussion, representatives from the Environment Agency Pension Fund and The Church Commissioners – which manages the Church of England’s investment portfolio – urged trustees, managers and the wider investment community to take heed of the findings of a new report on climate change.

The event was held by consultancy Mercer as it launched a report ‘Investing in a Time of Climate Change’, which analysed the financial impact of climate change.

It forecast that while developed market global equities will present downside risks to schemes, regardless of the climate change scenario over a longer-term time horizon, emerging market equity, infrastructure and real estate will benefit from policy changes and new technology in the climate change arena.

The report projected the potential impact on returns across portfolios, asset classes and industry sectors between 2015 and 2050, based on four climate change scenarios each with four risk factors.

You might not actually get there on your journey if in the next ten years there is extra policy that could impact your growth exposures and make it take longer to get you to where you want

Vanessa Hogg, Mercer

Edward Mason, head of responsible investment for The Church Commissioners, said the report should prompt a strategic response from the investment community.

He said: “Climate change is an investment risk and we’ve recognised this in our new climate change policy. We’ve made some divestment from the highest-risk, highest-carbon fossil fuels.”

Mason said The Church Commissioners’ fund has a high exposure to real assets, with around a third of the portfolio held in property, agricultural land and timber land.

“The variability on those asset classes under the different [risk] scenarios is really quite high and is something we will need to look at carefully,” he said.

Mason added the risks posed to developed market equities over the longer term were significant, and he called on schemes to raise these issues with their managers.

He said: “One very interesting conclusion that hasn’t been drawn out yet is on emerging markets… the conventional asset class that benefits most from orderly transition is emerging market equities and then emerging market debt.”

Growth assets

Vanessa Hogg, investment consultant at Mercer, said UK defined benefit schemes need to consider where they are investing in growth assets, even when approaching buyout.

“You might not actually get there on your journey if in the next 10 years there is extra policy that could impact your growth exposures and make it take longer to get you to where you want,” she said.

Hogg said many defined contribution schemes, driven into passive investment vehicles by cost constraints, would struggle to invest in emerging markets and real assets that stand to benefit from climate change.

“They can do it by looking at their UK exposures, heavily biased towards natural resources and the oil majors, maybe considering emerging market exposures as well,” said Hogg.

She added: “There might be opportunity for investment managers to develop DC-friendly products that allow schemes to invest in real assets.”

Faith Ward, chief responsible investment and risk officer at the Environment Agency Pension Fund, said there will be a first-mover advantage for managers gearing up to deliver specialist advice to funds.

“We’re looking for a truly integrated approach,” she said.

Ward said the risks of climate change could no longer be ignored by the investment community.

“It must become part of business as usual in the investment decision-making process,” she said, adding: “Clear prioritisation is the best starting point – have a targeted list and start from there.”