Climate change is now at the top of the ESG agenda. Caroline Escott reports on what this means for pension schemes.
Ask any regulator, policymaker, trustee, LGPS fund official or investment service provider what they think the hottest of all the hot environmental, social and governance (ESG) issues is right now and they will have one answer: climate change.
There are several reasons for this, both from a top-down regulatory perspective as well as bottom-up developments in terms of individual/scheme member engagement.
Firstly, 2019 saw the implementation of the Department for Work and Pensions (DWP)’s changes to the Occupational Pension Schemes (Investment) Regulations, which supported trustees to consider financially material ESG factors “including climate change”. Although the regulations are aimed at ensuring schemes consider which ESG factors are most relevant to their portfolio over the appropriate time horizon, this was a clear indication that although all ESG issues are hypothetically equal, some are more equal than others.
The seminal Regulation changes paved the way for other tweaks to relevant Codes and regulations. In October, the Financial Reporting Council (FRC) published the new Stewardship Code which for the first time explicitly mentioned the consideration of ESG issues “and climate change”; while the expectation is that the Ministry for Housing, Communities and Local Governance (MHCLG) will tweak its statutory investment guidance on Investment Strategy Statements for LGPS funds and decision-makers to including climate change as a specific expectation.
There is also clear and growing interest from the public in climate change. An August 2019 Ipsos MORI poll found that 85% of individuals in the UK were concerned about the issue, while protests by both Extinction Rebellion and the broader public have brought traffic and public transport to a standstill on many occasions over the last year. Campaign groups have capitalised on the fact that pension schemes are the most important interface between capital markets and individuals, and are a key part of the reason behind growing scheme member calls for pension schemes – particularly LGPS funds – to demonstrate how they are tackling the climate emergency.
The PLSA agrees that climate change is a systemic risk and one which will affect the overwhelming majority of businesses in every sector, bringing profound consequences for pension funds’ investments and ultimately individuals’ retirement savings. This is why we have long sought to support schemes in their consideration of climate risk. In 2017, we published a guide with ClientEarth to provide a framework for schemes to consider and manage their approach to climate change. Our popular June 2019 guide ESG and Stewardship: A practical guide to trustee duties, devoted a section and case studies to climate risk too.
Our 2018 and 2019 AGM Review and Voting Guidelines also specifically call out climate change as a key factor for investors to consider when undertaking engagement with firms, including when deciding how to cast their vote – a key tool in the stewardship toolkit – at company Annual General Meetings (AGMs). The next edition of our Voting Guidelines, to be published in January 2020, will provide further guidance for investors on how to assess the growing number of climate-specific resolutions being tabled at AGMs.
2020 will see pressure on schemes and their climate-related investment activities intensify. Ministerial intent on climate change – regardless of the colour of the next government – is very clear, as demonstrated by the recent letter from the Minister for Pensions to the top 50 schemes on this issue. Given that the UK will be hosting the high-profile global COP26 Climate Summit in November 2020, the pressure is on for the government to demonstrate its leadership in tackling the climate emergency.
Key amongst 2020 top-down developments will be the guidance for asset owners on using the Taskforce for Climate Related Financial Disclosures (TCFD) framework, a draft of which is being produced by the Pension Climate Risk Industry Group which the PLSA sits on. The guidance is intended to help asset owners of every size and shape comply with their new regulatory duties in advance of the 2022 TCFD reporting expectations for “large asset owners” as announced in the government’s Green Finance Initiative.
Next year will also see a double whammy in terms of scheme member engagement on climate change. Firstly, the new ‘implementation statements’ for DC schemes will come into force in October 2020, offering scheme members and civil society groups the opportunity to identify, assess and compare what their schemes are doing on financially material ESG issues. We know that campaign groups are already examining publicly available Statements of Investment Principles on this issue and feeding the results back to government and regulators.
Then the Make My Money Matter campaign – a high-profile initiative targeted at pension savers and backed by filmmaker Richard Curtis – will be encouraging scheme members to ask their schemes what they are doing to comply with the UN Sustainable Development Goals. The PLSA has already been helping individual schemes consider how they design their public-facing ESG and climate communications to ‘tell the ESG story’ so please do get in touch if you’d like to find out more.
Taken together with TPR’s incorporation of climate change as a key consideration in its supervisory regime – including 1:1 supervision – it is clear that schemes must continue to think not only about how they consider and implement climate-aware investment approaches, but also about how they communicate them to their scheme members, regulators and the industry.
The PLSA will continue to ensure the pension scheme voice is heard at every level of policymaking, and we continue to welcome all and any member views on how we can best drive the agenda forward in a way which works for both pension schemes and savers.