Do pension funds need to become more climate friendly?

Friday 22 February 2019

Melting globe Author: Karen Shackleton

Doing nothing about climate change is no longer an option for pension funds, argues Karen Shackleton

As an independent investment adviser to four local government pension funds (LGPS) and founder of the impact investing platform Pensions for Purpose - climate change - and its impact on investments - is a topic that I am discussing more and more frequently.
Probably the most sobering presentation that I have listened to was from Dr Gabrielle Walker, whose slides showing global temperatures over the past 100 years or so are enough to jolt even the most sceptical trustee into reviewing their pension fund’s carbon footprint. 

In addition, local government pension schemes (LGPS) have been targeted by climate change action groups who have attended the public committee meetings and urged funds to consider divestment from fossil fuels. So how should a pension fund think strategically about these issues and then implement a climate-friendly investment strategy.

Understanding the risks

The starting point is to understand the risks around climate change in the current portfolio and to challenge the fund’s investment managers on how they take that risk into account in their investment process. This is a “value-based” governance discussion to ensure that pension fund investments are maximising risk-adjusted returns over the long term, taking climate change risks into account. It does not mean changing the investment mandate, at this stage. Rather, it requires an understanding of how the manager embeds Environmental, Social and Governance (ESG) risks into their investment process. 

The trustees need to establish how their managers are evaluating carbon emissions, engaging with companies and voting on environmental issues. What is fascinating is the range of approaches taken and the variability in how serious asset managers consider this risk to be. 

Inevitably, this then leads trustees to consider whether to introduce “values-based” investing. Any pension fund, at this point in their climate-friendly journey, is advised to spend time discussing investor beliefs, before implementing an investment strategy that starts down the path of ethical investing or impact investing. It can be hard to come to agreement on strategic values, but time spent at this stage could be beneficial for future trustees who inherit the investment strategy and want to understand why environmental decisions were made. 

Karen ShackletonFor example, the trustees may agree that: “The choice of investments should actively take into account environmental considerations, so long as that does not risk material financial detriment to the total portfolio.” 

These overriding investor beliefs can then allow trustees to consider a set of “values-based” investment objectives for the pension fund. Some may simply choose to divest from fossil fuels. Others may decide on a more holistic approach, for example to implement a decarbonisation strategy across all asset classes. A few may wish to set themselves specific targets for reducing carbon emissions, over a given time period. And a minority may decide that they wish to be more proactive and allocate a proportion of the pension fund’s assets to impact funds that are intentionally addressing climate change and measuring their investment’s positive impact (such as renewable energy, low carbon technology, or energy efficiency funds). 

All pension funds are different. Investor beliefs vary… and change over time. But I remain convinced that this is a topic that every pension fund should have on its agenda, and one which should be revisited on a regular basis. Doing nothing about climate change is no longer an option.

Karen Shackleton is founder, Pensions for Purpose, and senior adviser, MJ Hudson Allenbridge



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