Climate change must move up the investment agenda, says Redington’s Rob Gardner.
As an industry, we can act together to provide a coherent response to this issue, but we must be prepared to think laterally and be open to the best ideas from actors outside the pensions industry, as well as innovation within our immediate sphere of influence.
Despite the direction of travel, adoption of low carbon or climate aware solutions remains piecemeal and has yet to break through to the mainstream
We are seeing rising expectations from savers that the ability to invest sustainably and strong investment performance should not be mutually exclusive. Regulators and investors now expect asset managers to take account of environmental, social and governance factors in the investment process.
One ESG factor in the spotlight is climate change. On November 4, the Paris Agreement on climate change, which legally binds countries to limit global temperature rises, came into force.
In order to meet intended nationally determined contribution pledges, governments must implement new policies to both reduce emissions and support an estimated $16.5bn (£13.3bn) of green infrastructure projects by 2030.
Pressure for change throughout the value chain
Pressure is being applied on the industry to provide solutions to climate challenges. Civil society has a seat at the table – from individuals to campaign groups such as ShareAction and Preventable Surprises – in conjunction with significant action by governments around the world.
Young savers are seeking to influence change in this area. A recent YouGov survey for Good Money Week reported that nearly half of millennials would like a fossil-fuel free option from their bank, pensions or savings provider.
Regulation also has a key part to play. We are already seeing the impact of France’s article 173 – requiring climate change-related reporting from institutional investors – on French pension schemes; and the forthcoming recommendations from the Financial Stability Board’s taskforce may well provide a catalyst for further regulation across the G20. This will require companies and asset owners to make climate-related financial risk disclosures.
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Socially responsible investment has grown in popularity in recent years, filling up column inches in the industry press and sections of annual reports, where schemes and asset managers outline their philosophies and approaches.
The challenge of creating a low carbon economy
We are seeing signs that the industry is now also rising to the challenge of transitioning to a low carbon economy. Data and index providers, asset managers and consultants have all responded to demand and are collaborating to create solutions for long-term savers.
However, despite the direction of travel, adoption of low carbon or climate aware solutions remains piecemeal and has yet to break through to the mainstream.
Lack of basic financial education, awareness about existing products, limited governance budgets of trustee boards and investor inertia have all contributed to slow-moving progress.
New collaborations which will help DC savers play their part in tackling climate change are therefore a positive step forward. Partnership between multiple players in the value chain is crucial in order to drive change.
Robert Gardner is a co-founder of consultancy Redington
