When it comes to making their schemes greener, trustees have a lot to get their heads around. But current climate-related legislation is helping to focus minds and offer a framework for meeting net zero targets.
Pension scheme trustees have much to juggle in 2022 as they balance fiduciary duties with growing environmental, social and governance-related responsibilities.
Fiduciary duties are at the centre of a trustee’s mission — they require these professionals to act in the best interests of their scheme beneficiaries to try to ensure members can enjoy a decent income in retirement.
The focus on net zero is becoming increasingly important to trustees and their schemes. However, as legislation demands the largest schemes adopt disclosure requirements, smaller schemes will be expected to follow suit in the coming years.
As long as trustees focus on the big picture, the legislative and regulatory regime is supportive of quality, forward-looking decision-making
Paul Lee, Redington
Despite this, the Pensions Regulator’s guidance on fiduciary duties does not make specific reference to net zero goals.
As trustees must consider any financial factors relevant to the performance of an investment, considering environmental factors should go hand in hand with these duties, argues Adam Gillett, head of sustainable investing at Willis Towers Watson.
“Climate is a financial risk; it is far-reaching, systemic and foreseeable. As investors, we have a really important role to shape the system going forward, to steward this whole economy transition. And it’s in all our best long-term financial interests to achieve a just transition to a net zero and resilient future,” he says.
“Simply put, a net zero target can and should be absolutely aligned with trustees’ fiduciary duty.”
Steven Sowden, principal in Mercer’s sustainable investment team, agrees: “It’s the trustee’s fiduciary duty to look after people’s pensions and manage the risks accordingly.
“Our analysis shows that in the long run, a failed transition is the worst scenario for investors, so it’s reasonable for trustees — as part of wider industry efforts — to look to support a transition to a low-carbon economy, [and] setting a net zero target is a sensible step in such a strategy.”
The evolution of legislation
Legislation on the journey to net zero has become increasingly stringent for pension schemes in recent years, and in October schemes with between £1bn and £5bn in assets will be forced to comply with the requirements of the Task Force on Climate-related Financial Disclosures.
The TCFD stops short of explicitly committing schemes to net zero targets. However, it requires that trustees establish and maintain oversight of climate-related risks and opportunities relevant to their scheme on an ongoing basis, and that those monitoring that governance on their behalf are doing so adequately.
These requirements were set out in the Pensions Schemes Act 2021. Regarding reaching net zero targets specifically, however, there are still no agreed industry-wide disclosure standards.
Despite this, Tim Currell, partner and global head of insurance investment at Aon, says the act gives “a clear framework for how trustees should address climate change and, therefore, raises trustees’ focus on this important area”.
He says that while the legislation does not specifically require the setting of a net zero target, it tends to push trustees in this direction.
“Once trustees work through the requirements of the act, it is a natural step for them to consider setting a net zero target and transition pathway as a way of managing their exposure to climate risk over the coming decades,” Currell adds.
Sowden notes that net zero-related legislation has been useful in highlighting environmental issues and providing the structure for trustees to take them into consideration.
“Our experience is that legislation provides sufficient flexibility for pension schemes to take a bespoke approach [to net zero],” he says.
“At the very least, trustees should have a strong understanding of how fund managers are incorporating climate change risk and opportunities into their strategies, and to make sure the funds a scheme is invested in support the transition to a low-carbon economy,” Sowden adds.
“Engagement with asset managers is an important part of the climate risk management process.”
Paul Lee, head of stewardship and sustainable investing at Redington, agrees that climate-related legislation has helped to focus the mind of trustees when it comes to target setting aligned with climate considerations.
What UK pension schemes can learn from abroad about reaching net zero
The UK is said to be leading on climate change; however, there are examples of best practice seen internationally that schemes could follow in the push for net zero.
Nevertheless, he argues that the complexity of the legislation, as well as the lack of specifics associated with it, can be problematic for trustees.
“There is some danger of trustees getting distracted by detailed considerations of what metrics to use and targets to set, which is tricky when so many measures are still being developed and while the available data has many gaps,” Lee says.
However, he adds that “as long as trustees focus on the big picture, the legislative and regulatory regime is supportive of quality, forward-looking decision-making”.
