Climate change has made ESG into a critical investment issue. The PLSA is stepping up on behalf of its members, reports Joe Dabrowski.
When the Summer 2019 edition of Viewpoint covered the rise of ESG – environmental, social and governance – factors in its article ‘Is this the year ESG went mainstream?’, I’m sure no-one could have predicted just where that storyline was about to go. In just a year we have seen an end to travel as we knew it, a fundamental change in the expectations of businesses in relation to their staff, and a significant wakeup call in the form of the Black Lives Matter protests.
It goes without saying that these societal issues have influenced the world of pensions and investments. The past few months has seen film director Richard Curtis launch a campaign to persuade individuals to engage with their pensions on ethical issues (promising that “Sexy, fun, life-changing, world-changing pensions” are on their way in 2021).
It’s clear from reading any financial publication that ESG – and in particular climate change – is now not just mainstream, but something of a hot topic. A recent Aviva survey found that more than half (55%) of individuals with investments felt that the pandemic had had an impact on the likelihood of them taking ESG into account when deciding where their money should go. And transaction network Calastone found that the amount of new money invested in ESG equity funds between April and July 2020 exceeded the combined sum for the previous five years.
It’s now clear that, by the time the much-discussed COP 26 happens in Glasgow in November 2021, it will be to a very different backdrop to the one it expected to have in its original slot in 2020.
So when the PLSA launched a Call for Evidence, and a series of roundtable discussions, on the issue of climate in the early days of Lockdown, it came as no surprise to us that participants were strongly of the view that the risk posed by climate change was both real and something they felt would and could be addressed. Indeed, despite recognition of a number of practical challenges, it was notable that all corners of our membership – funds, asset managers, advisors – had both the will and the desire to act to ensure that pension schemes manage the financial risks of climate change and the transition to a greener economy.
A Changing Climate
The subsequent report, A Changing Climate, was launched at our Annual Conference in October. In it we set out seven issues that our members told us stand in the way of investing in a climate-aware way, as well as the solutions that the pensions sector, wider financial services and government should prioritise.
- A lack of clarity in definitions: Members told us it was not always clear what ‘climate-aware investing’ actually means, and that the wide range of definitions and language is confusing. The PLSA is therefore recommending a joint government/industry taskforce to look at this.
- Poor-quality data: It was clear that the lack of consistent data and reporting is hindering pension funds’ ability to invest intelligently for a carbon-constrained future. As a result the PLSA will be lobbying for the widespread adoption of the TCFD reporting framework, and more measures to increase climate reporting throughout the investment chain.
- Lack of expertise in climate issues: We heard from members that they felt there was a lack of expertise in trustee boards and in the investment industry on the matter. The PLSA will therefore work to encourage more industry-led training and guidance.
- The need to set out requirements more clearly: If pension schemes are to deliver on an intention to invest in a climate-aware fashion they need to articulate that intention clearly enough that it will be delivered by their agents, including in investment mandates, RFPs, DDQs and service level agreements – and they need to hold their agents to account for delivery against those intentions.
- Better climate stewardship: Our discussions confirmed that stewardship remains a key element of effectively influencing companies on climate change. The PLSA has therefore committed to working to promote and enable this in a number of ways, including finding solutions to the challenges of voting in pooled funds.
- The need for a better supply of climate products: Pensions funds told us they felt frustration at the lack of investment products that meet their needs. The PLSA committed to continuing its lobbying work for a Green Gilt.
- The challenges of communication: We heard from the discussions that funds found it difficult to speak to beneficiaries and stakeholders about the work they’re doing on climate issues. As a result, the PLSA will be exploring an ESG Quality Mark, and building on existing work to support members in this area.
Change in action
Such is the pace of change in this policy area, we’re already seeing a number of these recommendations moving forward. In his November statement on the future of financial services, Chancellor Rishi Sunak not only set out a roadmap for full TCFD adoption – an important step in enabling pension funds to get better information from elsewhere in the chain – but he also confirmed that the government will launch a taxonomy to enable consistency on green definitions, another of the PLSA’s recommendations.
It was also announced that the government plans to launch the first Green Gilt in 2021, another lobbying priority for us this year. At the time of writing there has been very little detail on these announcements, but we’ll keep you posted.
It’s not just in government that we’re seeing these issues unfold. We’ve been pleased that the International Financial Reporting Council seems to be moving forward with plans for Sustainability Reporting Standards, another positive step to help funds access better information on their investments, and one which the PLSA has long supported.
However, the increased interest in these topics over the past few months brings both advances and challenges. The PLSA shared the concerns of many funds that the recent drive for an amendment to the Pension Schemes Bill – that would require pension schemes to achieve net zero in their assets by 2050 – not only failed to take into account the challenges highlighted in our report, but didn’t address the potential conflict with the existing fiduciary duties of trustees.
Having raised our concerns at the highest levels, we’re pleased that the government has agreed with us. However, it shows the need for the pensions sector to be front and centre of discussions, demonstrating the changes it’s making through active stewardship, adapting investment strategies and sharing with members and wider stakeholders the positive difference they’re making to address the climate emergency – which will, alongside the economic crisis, dominate the agenda for some time to come.