Confusion about climate-aware investments is creating a headache for pension funds, discovers Andrew Holt
A leading pensions policy wonk has called for greater joined up thinking when it comes to climate-aware investments.
Joe Dabrowski, deputy director of policy at the PLSA, told portfolio institutional: “One thing that came through loud and clear in our conversations with members was there was a real problem in measuring things, with lots of different initiatives in the UK, some by industry, some by regulators. We need things more joined up.”
The PLSA’s A Changing Climate report published in October identified that climate-aware investments is a big problem for pension funds. “There is substantial confusion about what climate-aware investment actually involves, and whether particular approaches can appropriately be referred to as relevant responses to climate change,” the report stated.
“Since we published the report is has been a pretty busy time on the climate front,” added Dabrowski. “But this is ultimately connected to the alphabet soup of initiatives that exist.
“We have come a long way in recent years, but there are pockets where there is confusion between terms, or terms are used interchangeably between regulators, providers and others. We have sustainable investment, responsible investment, impact investment, socially responsible investment and sometimes it can be a little confusing.”
And he added: “It is simply that there is still quite a lot of joining up to do across various initiatives to make sure things are most accessible and efficient for funds and their providers too.”
Dabrowski also noted the importance in joining the dots on the climate change agenda. “We also need more companies having to report. We also want to see consultants and investment advisers included, and, move things forward.
“It is important to have one common framework and a particular way of doing things. Then alongside that, how regulators approach the climate issue and have many more joined-up conversations.”
To tackle the issue, the PLSA recommends a joint industry/government review to examine the range of competing standards and definitions that currently exist, any initiatives already underway to achieve harmonisation, and to identify a framework to achieve a common language and taxonomy.
“The review should be established with the goal of delivering a common framework ahead of COP26 and take into account the views of employers, savers, pension schemes and intermediaries,” the report said.
“The government are very receptive to the need to do something,” noted Dabrowski, updating on how things have progressed since the report. But he added: “I think the challenge for the DWP is that they have quite an aggressive agenda for pension fund regulation.
“For them, it is a question of ‘bandwidth’ moving forward. And there isn’t one owner for this across government, so it is quite difficult to commit and get that joined up working.”
The PLSA report states that pension schemes also report that the substantive financial characteristics of many climate-aware investment products do not suit their needs. “These issues are particularly acute in fixed income – an asset class of great importance to pension schemes, particularly mature defined benefit schemes (DB) and defined contribution (DC) schemes during the pre-retirement de-risking phase,” the report said.
In November, the government announced it will issue its debut green gilt this year. To which, Dabrowski said: “Green gilts are great, but we have to make sure they are actually green and not just more gilts and greenwashing.”