Investment managers and consultants to be assessed by UK pension trustees on ‘climate competency’ under new guide

Green trees from above

Investment consultants are preparing for the onset of mandatory climate risk reporting at large UK pension schemes in October, with industry names including Aon, Mercer, and Willis Towers Watson publishing a new guide for trustees to assess the climate competency of their consultants.

The Investment Consultants Sustainability Working Group (ICSWG), a collaboration between 17 firms formed in 2020, developed the guide with input from ShareAction, The Pensions Regulator and the PRI. 

The guide says that investment consultants and asset managers should be required by pension trustees to demonstrate ‘climate competence' across five key themes. 

These include climate expertise and commitment both firmwide and individually, climate risk assessment tools and software, thought leadership and policy advocacy, and assessment and engagement with investment managers.

Mercer’s Brian Henderson, a member of ICSWG’s Regulation team, says: “It is important that pension scheme trustees ask their consultants and asset managers to demonstrate a best-practice approach to climate competence. We are already in the decade of transition and to deliver returns for our clients we need to understand the risks and opportunities that the transition will bring.”

This week, new mandatory requirements were unveiled by the Department for Work and Pensions, requiring large workplace pensions to take action on climate change by reporting on the climate risks within their portfolios.

“Climate change is a major systemic financial risk and threat to the long-term sustainability of private pensions. With GBP2 trillion in assets under management, all occupational pension schemes are exposed to climate-related risks,” said Guy Opperman, Minister for Pensions.

Trustees of pension plans with more than GBP5 billion in assets will be required to report on the financial risks of climate change within their portfolios from October, with the measures to be expanded in 2022 to smaller schemes of over GBP1 billion in assets.

Climate reporting is set to become mandatory across the entire economy by 2025, according to plans laid out by UK Chancellor Rishi Sunak. 

“Climate change is fast becoming the defining issue of our time and trustees of pension schemes need to know their advisers are on the front foot with this issue.  We are really pleased to be publishing this new guide to give trustees a practical way to assess the capabilities and approach of their investment consultants on climate change,” says another member of the ICSWG’s Regulation team, Ian Gamon of Lane Clark Peacock.

The ICSWG’s guide gives examples of ‘positive’ and ‘best practice’ indicators are proposed for each theme to help trustees assess their consultants in each area, underscoring the commitment of the ICSWG to ongoing improvement of climate change practices.

“The indicators are deliberately stretching with the aim of raising investment consultants’ standards and it should be acknowledged that some of these indicators will be aspirational. However, this is an important step towards developing good practice and practical guidance for schemes, in particular those seeking to align with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD),” says Luba Nikulina of Willis Towers Watson, co-Chair of the ICSWG.

The guide is supported by the member firms including Barnett Waddingham, bfinance, Buck, Cambridge Associates, Cardano, Hymans Robertson, ISIO, MJ Hudson Allenbridge, Momentum, Redington, River and Mercantile, SEI, and XPS Investment.

Annachiara Marcandalli, head of Sustainable Investing for Europe at Cambridge Associates, says: “We are investors, not scientists, but we also think like scientists, and what we are seeing in our data is that climate change is affecting both risks and opportunities for asset owners. Adding the dimension of climate resilience to both asset allocation and manager selection is a necessary step towards building greater resilience and long term out-performance.”

Large UK pension schemes such as BT Pension Scheme and the Church of England Pensions Board have already committed to the transition to a low-carbon economy by committing to net-zero emissions across their portfolios.