How pension schemes can help the UK meet its sustainability goals

Climate change is now high on the agendas of governments around the world. The UK was the first major economy to commit to achieving net zero by 2050, and earlier this year pledged to cut emissions by 78 per cent by 2030, compared with 1990 levels. 

At the COP26 climate conference, held in November 2021 in Glasgow, the UK was one of a number of countries that committed to curbing methane emissions, tackling deforestation, accelerating the phase-out of coal, and scaling up development of clean power generation.

Many fund managers have historically overlooked stewardship

Georgia Stewart, Tumelo

The financial sector will play a role in achieving national sustainability goals by using influence to persuade dirty companies to become cleaner. 

In October, large pension schemes with £1bn to £5bn in assets will be expected to comply with the requirements of the Task Force on Climate-related Financial Disclosures. Eventually, all schemes with assets of more than £500m will have to comply. 

Although the government’s and regulator’s guidance on implementing TCFD stops short of explicitly committing schemes to net zero targets, trustees need to to establish and maintain oversight of climate-related risks and opportunities relevant to their scheme on an ongoing basis. 

This includes monitoring any outsourced functions such as investment and fiduciary management to ensure they are also complying with the requirements.

“Trustees, and particularly those of larger schemes that are subject to report in line with TCFD, will have to disclose the extent to which their portfolios are aligned with the UK’s climate change goals,” said Celene Lee, principal and senior investment consultant at Buck. 

“Indeed, those who do not currently fall under the TCFD requirements are under enormous pressure to factor in climate risks and opportunities, and the same is true for the sponsors in many cases.”

Climate action is not the only issue pension trustees must consider. Fiduciary duties mean they must act in the best interests of their scheme beneficiaries, doing everything they can to ensure members retire with a decent income. 

This includes considering investment returns alongside environmental considerations. 

Lee says “going green” and generating returns are not necessarily mutually exclusive. Achieving common climate goals means changing how we consume energy as a society, and a “vast” investment must be made. 

With pension funds being long-term investors, “suitable green investments provide exactly the type of investments which can help trustees better align with climate goals, as well as achieving stable, long-term returns for pension schemes”, she adds. 

The power of persuasion 

As major investors, pension funds and their intermediaries can bring about significant changes in the behaviour of investee companies and fund managers to help achieve climate targets through effective stewardship of assets. 

According to Angela Winchester, trustee director at 2020 Trustees, opinions vary on how investors should use that influence. One view is that all companies currently undertaking high carbon activities should be immediately removed from an investment portfolio, she said. 

However, she warned this is something of a “blunt instrument”, which could risk excluding companies that may be investing in technology that can facilitate the transition to a low-carbon world. 

This could, in turn, impact future returns for scheme members — something trustees must consider as part of their fiduciary duties.  

Instead, active engagement is key, Winchester said. “Actively engaging with companies to understand and influence strategy and transition plans […] gives a more balanced view on whether the company should be retained in the portfolio long term,” she explains.

Georgia Stewart, chief executive of impact-focused fintech Tumelo, agreed. She said good stewardship is about setting expectations, engaging with companies, and voting at issuers. 

“Generally, trustees delegate all stewardship responsibilities to their fund managers. Many fund managers have historically overlooked stewardship, considered it a drag on resources, and usually outsourced most votes,” she continued.

“However, policymakers are homing in on stewardship as an important factor in obtaining good [environmental, social and governance] outcomes at issuer companies, and are increasingly focused on making sure trustees play a role in, or at least maintain, good oversight of stewardship activities.”

There are already examples of successful stewardship campaigns involving pension schemes. Last year, most ExxonMobil shareholders — including the Lothian Pension Fund and the Church of England’s pension schemes — voted to replace three of the oil behemoth’s board of directors with candidates from a slate nominated by climate activist shareholder Engine No 1.

“[Since then] the share price has climbed. Clearly, trustees of pension funds can use stewardship to reach positive outcomes for members as well as society, and they should work closely with asset managers to make sure their power is realised,” Stewart added.

Climbing share prices equal positive returns. Tom Selby, head of retirement policy at AJ Bell, argued there is plenty of evidence that considering ESG factors when investing could mean good news for investors and pension scheme members. 

“Even without government intervention, the importance of ESG factors had already been thrust to the top of the agenda for trustees and investors more generally,” he said. 

“There is ample evidence that, far from holding back returns, taking account of ESG factors is increasingly essential to delivering strong investment performance, particularly over the long term.”