How investment managers can help pension funds tackle climate change

26 Jan 2021


Imran Razvi, senior policy adviser and Miranda Seath, head of market insights at the Investment Association discuss how investment managers can help pension funds to implement more stringent rules on tackling climate change.

ESG investing has emerged as a core theme for UK investors, with the pensions sector leading the way, driven predominantly by an increasing regulatory focus on managing ESG and climate related risks.

Since 2019 trustees have been required to set out their policies for managing financially material ESG risks, including climate change, in their investment strategies. As of October 2020, trustees have had to show how they have put these policies into practice, through an implementation statement.

This is a major undertaking, and the first half of 2021 will see a significant focus by schemes on implementing their ESG-related investment policies, as well as documenting their progress.

However, the biggest change schemes face is the requirement in the Pension Schemes Bill – expected to soon become law – to ensure effective governance of portfolios with respect to the effects of climate change.

In practice, this will involve schemes with at least £5bn of assets and authorised master trusts disclosing information on their portfolios in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) from October 2021.

A year later, this will be required of schemes with at least £1bn of assets. In meeting their obligations, pension schemes will be reliant on their investment managers to assist them. As a result, developing data and information on the environmental characteristics of their portfolios is emerging as a separate area of portfolio analysis.

So how will the asset management industry help pension schemes address these challenges? As we set out in our recent industry position paper on climate change, Investment Association (IA) members have committed to working with their pension fund clients to help them meet their climate-related disclosure requirements. This includes helping them solve issues on data quality and consistency, including standardisation and accessibility of data.

That’s the near future, but the industry has already been helping pension funds incorporate ESG factors into their investment strategies. A recent report on master trust investment strategies showed that schemes were using a variety of approaches to incorporate ESG considerations, including stewardship, exclusions, tilts and customised mandates focused on specific ESG themes.

Integrating ESG factors into investment strategies now applies to circa £3.23trn of the assets managed by IA members. The decision to invest responsibly is not bound by the rise and fall of the markets. The long-term investment horizons of pension funds mean that investing for social or environmental good is pivotal in supporting enduring change.

2020 has shown that investing responsibly does not necessarily mean sacrificing returns in a year of strong performance for ESG strategies. Some of this strong performance relates to the sector biases of responsible investment: higher weighting to technology stocks and screening out oil and gas stocks, for example, are typical approaches.

Increasingly, however, investment managers argue that companies run sustainably are well positioned to deliver better results. Climate change continues to be at the top of the UK government’s agenda and as investment managers and pension funds step up their work to support tangible change, the UK will play host to COP 26 in 2021.

Pension schemes and investment managers have a significant opportunity to help the government build ‘a greener, more resilient financial system’. This commitment goes beyond the financial system as the UK seeks to meet its target of becoming carbon net zero by 2050. It is also a commitment to pension investors that our industry can safeguard their retirement savings whilst investing in the fight against climate change.

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