Why trustees do have influence in the shift to UK net zero

The risks and opportunities arising from climate-related change are an area of increasing focus for pension trustees. But what can trustees really do given the scale of the challenge. David Fairs, The Pensions Regulator’s Executive Director of Regulatory Policy, Analysis and Advice explains how schemes can and must make a difference in the transition to a net zero economy.   

A landscape of resilient pension schemes that protects savers from climate risk is entirely within our reach.

It’s no secret The Pensions Regulator wants to work with trustees and shape the industry debate to deliver that future. We want action, not just well-meaning intentions.

In this context, we launched the latest step in our work to support trustees as they consider climate-related risks and opportunities – a consultation on our new climate-related guidance.

We urge all trustees and advisers to take this chance to shape our guidance and join in the consultation, which ends on 31 August.

Growing pressure

It’s clear that pressure for the pensions industry to play its part in the transition to a net zero economy is growing.

From October, larger schemes, with assets under management of £5 billion or more, will have new duties on the governance and reporting of climate-related risk and opportunities.

In 2022, they’ll be joined by schemes with assets under management of £1 billion.

By the end of 2023, we expect 81% of memberships will be in schemes which must comply with these duties.  And smaller schemes could follow suit

We know campaign groups are calling on savers to use the power of their retirement savings to meet net zero targets and take action in the face of the climate crisis.

Research from Make My Money Matter said savers switching to a “greener” pension could do more to tackle climate change than driving an electric car or a vegan diet.

But some argue there’s little pension scheme trustees can do in the face of global temperature rises. I disagree.

Right and prudent

Pensions schemes can and must make a difference in the transition to a net zero economy.

Whether trustees think paying attention to climate-related risk and opportunities is the right thing to do or the prudent thing to do – they’re right.

Climate change is a systemic risk. It poses financially material risks to sponsors of DB schemes, to the value of funds and their investments, as well as a risk to economic stability and the long-term survival of the planet. The impacts of climate change are that stark.

The way a scheme’s investments are stewarded, or looked after on behalf of savers, does have the potential to be powerful. Powerful in protecting, or even enhancing, savers’ retirement outcomes.

Asset managers and companies may be closest to the flows of capital, but it is the responsibility of trustees to set the policy on how financially material considerations, such as climate change, are taken into account in the selection, retention and realisation of pension scheme investments.

Even where trustees feel their advisers and asset managers are doing a satisfactory job considering climate-related risks and opportunities, the trustees have a duty to monitor whether their expectations are being met. Trustees should challenge asset managers and advisers to improve their processes where appropriate. Ultimately, if a scheme’s advisers do not sufficiently consider the risk and opportunities from climate change trustees can vote with their feet by re-tendering with mandated climate-related criteria or by appointing specialists.

Research from XPS Pensions Group suggests nearly all the 200 defined benefit trustees and professionals surveyed (95%) agreed on the importance of environmental, social and governance (ESG) policies and 90% were in favour of addressing climate change risk within their investment strategy.

The same percentage felt schemes should actively pursue positive impact to society when doing so does not detract from financial objectives.

A way to go

But less than half (40%) believed their scheme’s ESG policies reflected their preferred approach to sustainable investment. More than three-quarters (78%) wanted to monitor the activity of investment managers beyond minimum compliance checks to avoid greenwashing – the act of misrepresenting a product, service or investment, to make it appear more sustainable than it actually is.

Applying pressure on investment managers to pay more attention to climate change in the building of portfolios and investment selection should drive those looking to attract investment to accelerate their plans to make their business more sustainable.

Where trustees demand, supply should follow. A greater emphasis on stewardship, with clear goals for that work, should improve long-term value and minimise risk from factors such as climate change.

Stewardship Code

But that engagement must be meaningful if it is to drive change. Trustees must be clearer with their investment managers than simply saying “do ESG stewardship for us” as this does nothing to challenge the investment manager’s existing approach, which may differ from that adopted by the trustees. A stewardship strategy is essential, with clear goals and plans for next steps if stewardship isn’t influencing as desired.

We encourage trustees to sign up to the 2020 UK Stewardship Code, which outlines best practice on improving investment governance and risk management while driving long-term success; and on communicating activity and progress towards addressing systemic risks such as climate change.

Climate change has the potential to be the biggest threat to the stability of the systems on which pension savers depend for access to their savings at the end of their working lives. But that doesn’t mean we are powerless in the face of that threat.

By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice