The UK is said to be leading on climate change; however, there are examples of best practice seen internationally that schemes could follow in the push for net zero.
An international effort is taking place to combat climate change. Having recently hosted COP26, the UK is one of the countries at the heart of the effort and soon it will be mandatory for all large public companies to disclose their climate impact in line with Task Force on Climate-related Financial Disclosures recommendations.
The pensions industry is no stranger to this, with the very largest schemes already obligated to report against TCFD-aligned disclosures.
Will Martindale, group head of sustainability at Cardano, says the UK should be commended on what it has achieved in the pensions space when it comes to sustainability.
Regulation is always influencing what Europe and the UK are doing, but it’s only ever playing catch up — what you are required to do won’t ever be the best thing to do
Adam Gregory, Cartwright
“Guy Opperman and the pensions ministry deserve credit for helping to advance the conversation around how UK pension fund trustees should adapt and improve strategy around climate change,” he notes.
“Europe and the UK have taken slightly different approaches to sustainability goals, [but] if we look at Europe, the UK is the leader on sustainable finance. At COP26, [chancellor of the exchequer] Rishi Sunak said he wanted London to be the first net zero financial centre, and net zero as a framework has been well socialised within the UK investment community.”
Taxonomy versus TCFD
EU countries have adopted taxonomy for sustainable activities — a classification system that groups companies by their economic activities, consistent with the goals of the Paris Agreement. These include making use of data around their climate change mitigation and adaption strategies.
By comparison, the UK focus has been largely on TCFD. When the legislation is enshrined into law this year, the UK will become the first G20 country to mandate TCFD-aligned climate disclosures across the economy.
Make My Money Matter campaign director David Hayman says TCFD recommendations are an important step, but more needs to be done if the UK is to hit the targets set out by the Intergovernmental Panel on Climate Change, including limiting warming to 1.5C.
TCFD “forces people to disclose where they are in terms of their emissions, but given it’s disclosure and not action, we feel it will come too late if we’re waiting years for people to provide information, and then years to act on that information”, Hayman notes.
“We need to start acting now, we can’t wait three, four or five years to disclose and analyse and then act in the latter half of this decade.”
Pockets of international best practice
Hayman notes there are isolated examples from around the world of good practice when it comes to pension schemes acting on climate change.
“In Australia, funds [have] conversations with members, capturing their views and making sure these are incorporated into investment decisions, particularly on climate,” he says.
“In the US, you have more visibility over where your money is being invested on your behalf in the pensions industry, and therefore that’s a critical step in consumer engagement and giving people a bigger voice and choice when it comes to where their money goes.”
Elsewhere, in the Netherlands, the country’s government pension scheme has committed to divest from several oil and gas companies that are believed to be not reducing their carbon footprint quickly enough.
The Netherlands-based Michel Iglesias del Sol, managing director of investment strategy at Kempen Capital, says that from a Dutch perspective best practice involves committing to the Paris Aligned Benchmark for all asset classes “where reasonably possible”.
“This entails an initial 50 per cent reduction in greenhouse gas intensity, followed by continuous year-on-year decarbonisation targets of at least 7 per cent,” he adds.
“These greenhouse gas-reduction targets are not only applied to equities, but also to other liquid asset classes such as investment-grade bonds and high yield bonds.”
What’s next for UK schemes?
Adam Gregory, senior investment consultant at Cartwright, believes schemes should not wait until they are mandated by regulation to make changes that will contribute positively towards net zero.
“Regulation is always influencing what Europe and the UK are doing, but it’s only ever playing catch up — what you are required to do won’t ever be the best thing to do,” he points out.
The challenges facing trustees seeking net zero
More pension schemes are committing to net zero agendas than ever before, but reporting and analysing climate-related disclosure data is no easy task for trustees.
“I would be saying to trustees, ‘don’t wait to be told to do it. You must make decisions before regulation requires you to do so. Make sure your portfolio is sustainable and positioned for the changing economy’.”
Hayman argues that UK schemes must deliver on their net zero commitments, with 2022 a crucial year for building on progress already made.
This includes “aiming for big delivery on those goals will include consumer engagement, investing in climate solutions, engaging with companies that aren’t transitioning [to net zero] or engaging”, he says. “There needs to be more collaboration and sharing.”
