What’s keeping pension scheme chief investment officers awake at night? We’re currently recording a new series of the DCIF’s podcast, and we’ve posed this question to each CIO we’ve interviewed.
So far, everyone’s answer has been the same: the existential threat posed by climate change, and what it means for future generations.
Their clear passion for this subject shows that, reassuringly, the will is there at the most senior levels when it comes to acting on climate change.
In such a fast-evolving area of science, it’s imperative to make sure that the assumptions that schemes are making about climate change are correct. In recent weeks, several reports have highlighted the limitations of current models and called for a rethink.
Writing for the DCIF as an independent consultant, Nico Aspinall recently analysed a selection of master trust pension schemes’ first TCFD reports. Schemes used a wide range of methodologies in their scenario analyses, making comparability almost impossible, he found.
For instance, one master trust forecasted a 50 per cent drop in the equity market in a three-degree scenario, while another assumed a two per cent uplift to pots in the same scenario. Without being able to compare like with like, it is difficult to understand how effectively schemes are managing climate change risk.
Master trusts
That said, when it comes to making climate forecasts, schemes have a difficult task. The simple fact is that we don’t know – and hope we never find out – how the world would look if we fail to address climate change. It’s very hard to imagine the true economic fallout of mass migration, extreme weather events and famine.
To create a clearer picture, experts have called for a more narrative-driven approach to climate scenarios. The Universities Superannuation Scheme (USS) and the University of Exeter recently presented four new climate scenarios that (they argue) capture “a richer, broader and more realistic range of possible developments on which to base decisions,” in their report, No Time To Lose: New Scenario Narratives for Action on Climate Change.
We applaud their efforts; it is easy to set out what’s wrong with current scenarios, but much harder to suggest an alternative approach. We hope that master trusts will take note of the scenarios set out in the paper and join the conversation. A more collaborative approach will allow us all to learn from each other, as well as making comparability between different master trusts possible.
Yes, master trusts are competing for business, but this should not make collaboration impossible. The DCIF is mostly comprised of competing asset managers, but this has never stopped us from being able to work together on research in the interests of DC scheme members.
“Without being able to compare like with like, it is difficult to understand how effectively schemes are managing climate change risk.”
Meanwhile, what should trustees be doing? The Pensions Regulator has been quick to respond to our report and others’. It published a blog on how trustees can ensure they are making effective decisions.
You can read the full blog here, but essentially the same principles of good trusteeship remain true: keep reading about climate change and ask for training from your consultant or asset manager where you feel it’s necessary.
Keep questioning your service providers to make sure they are grasping the nettle on climate change. Understand the narratives which underlie their climate scenarios, as well as their limitations (which are inevitable; nobody can see into the future). Consider stress testing your investment strategy.
Climate change is the challenge of a lifetime. It has been great to see the industry coming together to discuss this topic, and we look forward to continuing the conversation.
Louise Farrand is executive director of the DC Investment Forum
