Pension funds embrace 'climate-aware' investment, says PLSA report
The pensions industry has identified solutions to the barriers that prevent pension funds from fully embracing climate-aware investment.
To explore and help resolve the issue, the PLSA has published its climate investment report during the organisation’s first-ever virtual Annual Conference, identifying some key recommendations to overcome some of the obstacles.
Speaking to more than 80 delegates representing some 60 funds directly and many hundred more indirectly in a series of virtual roundtables over the summer, the PLSA heard that there is universal appetite among schemes and their service providers to take climate change seriously and to invest with a sense that a carbon-constrained future is coming. However, it also was told that there are a series of barriers stopping them from being able to do so.
The roundtables identified that, in some cases, there is an immature infrastructure around climate-aware investing, such as inconsistent definitions and language, as well as limited or poor quality data or lack of investment products with a full range of necessary characteristics. Other challenges arise from limited expertise and training on climate change issues across the investment chain, including the senior decision-makers at pension schemes (most notably on trustee boards). In other cases, the issues are around structural challenges in the investment chain and the need for better alignment of duties and disclosures along it. Pension schemes cannot resolve these issues alone if they are to deliver the change that is necessary. A system-wide approach is needed.
From these discussions the following recommendations were made to overcome seven identified barriers:
Clarifying definitions of climate-aware investment – The PLSA recommends a joint-industry/government review to examine the wide range of competing standards and definitions that currently exist, any initiatives already underway to achieve harmonisation, and to identify a framework to achieve a common language and taxonomy ahead of COP26.
Addressing poor-quality climate data and information – The PLSA will encourage the government and regulators to move towards more widespread adoption of the TCFD recommendations and support measures to increase equivalence of climate reporting or regulatory obligations from the top to the bottom of the investment chain.
Delivering greater climate expertise and education – The PLSA will encourage more industry-led ESG training and education, work with TPR to ensure guidance for schemes is suitable and support the FCA in working to design explicit climate conduct expectations.
Articulating requirements more explicitly – The PLSA will work with the International Corporate Governance Network (ICGN) in revising and renewing its Model Mandate and produce guidance, templates and best practice material for members and trustees.
Enabling better climate stewardship – The PLSA will further develop its guidance for members on what good practice expectations ought to be with regard to stewardship services and continue to encourage schemes and managers to adopt the Stewardship Code, and to play a pro-active role in industry Stewardship groups. It also commits to working with the investment industry and regulators to find solutions to the challenges schemes face when exercising stewardship and voting ‘rights’ in pooled funds.
Improving supply of appropriate climate ‘products’– The PLSA will continue to make the case to Government for the issuance of a Green Gilt by the UK Government and work with the investment industry and regulators to develop principles for ESG asset management funds/products to adhere to on ESG generally, or specifically with regard to climate.
Communicating and explaining climate-aware investment – The PLSA will explore the feasibility of creating a Pension Quality Mark for ESG and build on our work on implementation statements to consider how best to support members in their communications with beneficiaries.
Richard Butcher, Chair PLSA, says: “Climate change is a massive issue and the pensions industry has the opportunity to help mitigate its impact by investing in a climate-aware way. This report highlights some of the barriers to climate aware investing – none of which are insurmountable – and proposes some actions to overcome them.
“We’ve spent a great deal of time talking to all parts of the pension investment chain about these barriers and, while some pension schemes are already taking a proactive and leading position on the subject, there is a genuine appetite throughout to address them and do more.
“The PLSA is here to help the pensions industry overcome the barriers and to work with others in the investment chain to deliver the essential changes.”