COP26 will kick-off on October 31, a date surely circled on the calendar of pension scheme professionals across the country, as dominating this year’s conference will be a highly anticipated update on the progress of meeting global net-zero targets by 2050.
Ahead of the conference, the UN has stated that mobilising finance will play a crucial role in achieving this target, as the process will need unprecedented levels of private and public finance.
However, pension providers are not implementing change fast enough, says Make My Money Matter, an organisation that early in October reported 72 of the 100 major UK schemes have yet to make robust net-zero emissions commitments. This means almost £2tn of pensions capital remains unaligned with the Paris Climate Agreement.
Chris Gower, director of global consultants and pension funds at Fulcrum Asset Management, agrees with this sentiment: “While pension funds are moving more quickly now than a few years ago, currently the pace of change is not quick enough to meet the net-zero objectives by 2050.”
While pension funds are moving more quickly now than a few years ago, currently the pace of change is not quick enough to meet the net-zero objectives by 2050
Chris Gower, Fulcrum Asset Management
He notes that the Task Force on Climate-related Financial Disclosures “has been a positive force for change for pension schemes”, though it only currently applies to those above a certain threshold in assets under management.
“This framework has led to a lot of good thinking around modelling of liabilities and setting an investment strategy that is mapped to a net-zero world. However, in reality the fundamental reallocation of capital needed to genuinely align is still behind where it needs to be,” Gower argues.
Despite this lack of progress, optimism remains elsewhere in the industry. Industry-wide commitments to reaching net zero are ongoing, and Neuberger Berman director of environmental, social and governance investing Sarah Peasey says: “A large, and arguably very influential, part of the investment industry has committed to measure and manage portfolio carbon emissions, with the ultimate goal to reach net zero by 2050.”
The explosion of responsible investing in recent years has been partly behind this, due to increased media attention of climate change and more investors willing to hold unsustainable companies to account. This activity is also advancing the technology required for pension scheme providers to achieve net zero by 2050.
Peasey explains: “The sophistication and availability of climate data and stress-testing is vastly improving, so too is the ability to discern those companies that are setting legitimate and achievable ambitions, and those who are simply attempting to pass the problem on to the next generation.”
Overcoming barriers
One pension scheme that has recently committed to net-zero targets by 2050 is the defined benefit scheme sponsored by HSBC.
A spokesperson for HSBC Bank (UK) Pension Scheme told Pensions Expert that there are challenges now facing the scheme to meet this target: “There are numerous governance, technical and modelling complexities that the trustee will need to overcome, and the industry will need to evolve methodologies to capture the greenhouse gas emissions associated with sovereign bonds.
“Data coverage with respect to climate metrics and the calculation and reporting of scope 3 emissions will also need to develop further.”
The challenges faced by HSBC reflect those of many pension schemes in the industry. Greenwashing can be a barrier to good investment decision-making, and is now a predominant issue across the pension industry. A 2021 report by Schroders found 59 per cent of investors highlighted this issue as their biggest concern.
“Greenwashing continues to be a core concern and doubts persist about the ability to measure and manage risk when investing sustainably,” says Andy Howard, global head of sustainable investment at Schroders.
“Furthermore, institutional investors want to know more about their sustainable investment options. They need clarity on the goals and strategies fund managers employ and ways to track their performance. Increasingly, many also want to know the impacts their investments deliver.”
This is requiring more resources from pension funds. At HSBC, confirming the veracity of investee companies’ claims includes “enhancing its engagement and stewardship efforts through the scheme’s asset managers”, and “delegating detailed implementation of the targets to its Asset and Liability Committee, to ensure appropriate governance oversight and resources are committed to implementation.”
Industry-wide initiatives can also be of assistance with overcoming these barriers. At Neuberger Berman, Peasey explains that the company’s starting point was using the Net Zero Investment Framework as set out by the Institutional Investors Group on Climate Change.
Adaption: How schemes can tackle climate and social issues together
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.
The framework provided Peasey and her team with practical initial steps, but she says that the rest has been up to the company to develop thorough processes in order to get its portfolios aligned with these goals.
“Building a net-zero investment solution requires a multi-tool approach to identify both risk and opportunity,” she says.
“Using modelling and stress-testing, engaging with companies, identifying opportunity, or at last resort divesting — ultimately, it is a combination of all the tools which will get us there. There is no one size fits all and creating climate solutions requires a pulling on different levers.”
