How can pension trustees remain vigilant against greenwashing?

Whether it is the move to a greener economy, increasing regulations, or managing the just transition, the key to managing climate-related risks is understanding how these evolve over time.

Trustees are, of course, quite used to thinking about long-term ‘journey planning’ in other contexts – for example, funding – but it becomes especially difficult when it comes to issues as systemic as climate change, especially if schemes need to think about their entire supply chain.

This is a particular challenge if it becomes too easy for companies and investment managers to make misleading statements about their long-term plans on climate.

There is a worry about ‘greenwashing’ – fig leaves and false nods to environmental, social and governance credentials made for short-term gain, rather than meaningful adjustments in the medium and long term.

At the same time, if there are fears about too much scrutiny on missed or replaced goals (even if this might be understandable or reasonable), there is a risk of a chilling effect.

Companies may choose to say less, and therefore do less, than they might on climate, deciding the immediate trade-offs are not worth it – a phenomenon sometimes called ‘greenhushing’.

How do pension trustees plan for the future?

The question, then, is how do trustees achieve this magic blend of super-forecasting and risk management – and be vigilant for both greenwashing and greenhushing in their supply chains?

Fortunately, trustees and regulators are thinking about the answer to this question. We are seeing pension fund trustees do lots of good work in setting credible targets for helping manage climate risk over time.

This lines up with the Pensions Regulator’s expectations that trustees will have oversight over climate change and scrutinise companies’ and investment managers’ climate change policies.

A data solution for greenhushing

On the greenhushing side, we think a key part of the answer is data-driven, robust plans for the reduction of climate-related risks.

Resources such as guidance from the Transition Plan Taskforce in the UK make it easier for pension scheme trustees to spot best practice for transition planning across a range of industries and sectors.

Transition plans are a useful tool for trustees to have for their own pension scheme, but also to use in relation to their investments to help identify the progress being made by scheme assets.

We’d expect the quality of transition plans to only improve over time. The Labour government proposed mandatory transition plans in its manifesto for UK-regulated financial institutions, including pension schemes, and large companies.

Greenwashing and regulation

Of course, these detailed plans are only helpful to the extent that trustees have confidence they will actually be followed. This is why it is important that regulators are also putting increased scrutiny on companies and asset managers to help tackle greenwashing.

This can be seen in parallel areas such as the Financial Conduct Authority’s (FCA) anti-greenwashing rule, introduced this year.

This allows the FCA to take action against misleading sustainability claims, and could provide a blueprint for future supervisory and enforcement action by other regulators.

With pressure from activist groups and other sources likely to continue, it seems inevitable that a high-profile anti-greenwashing case will be brought by the FCA or another regulator in due course.

While the FCA requirements don’t directly apply to trustees of occupational pension schemes, they are an important piece of the jigsaw for trustees to understand what may be lurking in their investments’ supply chains and to learn lessons from those entities that are subject to those requirements.

If trustees are able to see in concrete terms how companies and investment managers will plan for climate change over time – and trust them to carry out these plans – it becomes so much easier to carry out their own long-term planning.

Andrew Black is a senior associate and Samuel Fulda is an associate at Eversheds Sutherland.