As the COP26 conference draws near, the summit’s theme of ‘adaptation’ has raised questions around how schemes can align their environmental and societal commitments to protect the planet’s ecology and communities.
With climate change intertwined with global patterns of inequality, according to The World Bank, Cartwright senior investment consultant Adam Gregory argues that schemes need to develop this economic interconnectivity.
“Knowledge of human impact on the planet has increased enormously in recent years and with greater knowledge comes greater power,” he says.
He adds that once schemes begin to address the largest, most pressing issues, the smaller and more localised environmental and societal problems come to the fore.
There is less consensus around the ‘social’ aspect of ESG and this is an area where schemes still have some way to go
Celene Lee, Buck
Gregory notes that “overfishing, land degradation, deforestation, slave labour and poor working conditions” are all issues that bisect both environmental and social issues — and require greater efforts from the financial sector to overcome.
For example, land degradation is a driver of climate change and has a profound impact on livelihoods, impacting up to 3.2bn people, according to the UN’s Intergovernmental Panel on Climate Change.
Specialised investment pools have been created to address such issues. Funds such as Mirova’s Land Degradation Neutrality Fund aim to generate positive environmental and socio-economic impacts alongside financial returns for investors.
Adapting trustees’ role
Shalin Bhagwan, head of pensions advisory and Emea consultants at DWS, says that while driving change does require top-down commitment, especially from “major carbon-emitting regions”, it is ultimately “up to trustees to enact change”, with engagement being a powerful tool to fuse environmental and social efforts.
This puts further responsibilities upon trustees. Their role has been changing, with a growing emphasis on sustainability-linked regulations now permeating the day-to-day running of schemes.
As of October 1 2021, large schemes have had to start complying with the Task Force on Climate-related Financial Disclosures reporting framework. However, a recent survey from the Confederation of British Industry and Mercer found that trustees’ understanding of the TCFD framework is low, with only 8 per cent being confident in its requirements.
Moreover, concerns that the governance burden will not translate into value for members have been voiced by the industry, with cost implications and the necessity to process vast amounts of data and information drawing industry criticism.
Celene Lee, principal and senior investment consultant at Buck, says that the TCFD framework places a heavy emphasis on the environmental attributes of environmental, social and governance responsibilities, but does not provide schemes with an industry-wide consensus on social-related aspects of sustainable investing.
She notes that most schemes are already “doing their part” in making environmental disclosures.
“However, there is less consensus around the ‘social’ aspect of ESG and this is an area where schemes still have some way to go,” Lee adds.
“There are still many divergent views within the industry on what progress actually looks like and how schemes can go about achieving it.”
Investing for change
Yet addressing environmental issues without simultaneously tackling social issues can present schemes with additional risks, Gregory warns.
He says that if one risk exposure dominates, such as a focus purely on environmentalism, “trustees cannot see the wider picture and risk missing other opportunities”, both in terms of investment as well as potential financial risks.
“Climate is high-profile right now, but there is a much wider issue about environmental and social costs of doing business that have historically been ignored, as businesses typically have not had to bear these costs,” he adds.
There is also a risk of falling foul of social issues while investing in environmental projects, according to Wendy Mayall, chair of Renewity, a renewable energy investment specialist.
She says that environmentalism can be called out as a “middle class luxury”, where components for products use materials such as lithium and cobalt, “which are notoriously controversial in their extraction”.
Mayall — a former trustee at the Mineworkers’ Pension Scheme — adds that such issues are “never easily resolved, and even where there is a clear answer it is likely to be a journey rather than a quick fix”.
Environmental and social resilience
The COP26 theme of adaptation centres on adapting to the changing environment through resilient infrastructure and agriculture to avoid further loss of life, livelihoods and natural habitats, while also supporting the socio-economic development of disadvantaged communities.
Are schemes ready to mitigate carbon through their investments?
COP26 guidelines dictate four main ways for the world to become net zero by 2030 through the mitigation of carbon production. The challenge for pension funds is getting to grips with how these can be aligned with their investment process.
All the while, the opportunity to build momentum to ensure that carbon-intensive nations make commitments that benefit economically disadvantaged countries is central to the premise of COP26.
For pension schemes, one key area that can be capitalised upon on the back of the summit is renewable energy, according to Lee. She says this provides schemes with an “environmentally conscious” investment that can also benefit people socially through cleaner water, more stable eco-systems, and employment prospects.
“It’s a rapidly growing sector with a lot to offer investors,” she adds. “Renewable energy investments tend to be long-term, income-generative investments, and are, as a result, particularly suitable for long-term investors such as pension schemes.”
