ESG factors could improve pots

This article is part of
The times, they are a changin’

Climate change must be considered

One factor that has often been dismissed as a purely ethical issue is climate change. In 2016, the Pensions Regulator published new guidance on pension scheme investment that stated clearly that climate change is likely to be financially material to funds, especially over the long term. 

Yet the guidance failed to change behaviours, and a survey conducted later that year by Pensions Buzz showed that 53 per cent of pension professionals still did not consider climate risk as financially material to their investments. 

This lack of understanding is a key motivation for the government to specifically refer to climate risk in the new investment regulations. Trust-based pension schemes are now required to develop policies on how they consider financially material factors, defined by the government as material “[ESG] considerations, including but not limited to climate change.” 

The government drawing out climate change as a specific issue is welcome. It is cross cutting, systemic and wholly under appreciated by asset owners. Research for the UK Sustainable Investment and Finance Association’s event, Ownership Day 2018, found that 90 per cent of fund managers expect climate risk to significantly impact oil company valuations within two years. Oil and gas represent the third most heavily weighted industry in a typical default fund, yet 41 per cent of managers say they have no engagement strategy to mitigate climate risks. 

Litigation risk is something schemes will need to consider in relation to climate change.

ClientEarth is a not-for-profit firm of environmental lawyers that has taken the government to court – and won – on its failure to meet its legal obligation on air pollution. More recently, it has put 14 of the biggest UK pension schemes ‘on notice’, meaning that they are at risk of being sued if they do not consider climate-related financial risks during the investment process. 

ClientEarth pensions lawyer Joanne Etherton said: “The law requires pension trustees to consider all financially material factors when determining investment policy – for many schemes, this will include climate change. 

“There remains confusion among some of those who manage pension schemes who think that ESG risks and financially material risks are mutually exclusive – they are not, and proposed clarifications to the law are set to bust this myth for good. The impacts of climate change pose a serious risk to pension investments and this needs to be reflected in investment decisions.”

Members want SRI

The new regulations also represent an opportunity for the sector to innovate and meet demand for sustainable products. Polling for UKSIF’s Good Money Week 2017 showed that 47 per cent of the public wanted to both make money and make a positive difference to the world.