Impact of climate change crisis on how funds are invested

Both employees and employers have been citing climate change as among the most important factors providers should be prioritising when deciding on investment strategies for pension contributions.

Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, says that of all the ESG issues, “climate change is arguably the biggest” and that “it can be argued that it’s the largest existential threat ever faced by humanity”.

She says: “The need to transition to a low-carbon world to slow down the effects of climate change and grow the green economy is now broadly accepted.

“This will require not only new ways of thinking, living and working – but new ways of investing too, both for the prosperity of the UK and to help safeguard pension savers’ investments and financial futures.”

Nazarova-Doyle sees this as an opportunity presented to fund managers and providers to “participate in and influence this transition” specifically for “the long-term benefits of customers”.

With such an opportunity at play, it seems most providers will be competing to make sure their ESG targets and actions are working for employer and consequently, employee retention.

Nazarova-Doyle explains that Scottish Widows is halving the carbon footprint of all its investments by 2030 on the path to net zero by 2050.

The need to transition to a low-carbon world to slow down the effects of climate change and grow the green economy is now broadly accepted.Maria Nazarova-Doyle, Scottish Widows

Alongside this the provider is using shareholder voting power to drive companies to make the necessary changes within the timescale, backing climate solutions.

She says: “We’re doing this by investing in companies adapting their businesses to become carbon neutral and those developing climate solutions, while reducing our investment in high carbon-emitting companies.

Nazarova-Doyle adds that Scottish Widows is also increasing investment in climate solutions such as renewable energy, low carbon buildings and energy-efficient technologies.

“By taking this action, we’ll be assisting and incentivising companies we invest in to embark on decarbonisation pathways of a scale and pace needed to meet the 1.5°C global warming objective of the Paris Agreement.” 

Transitioning to a net zero world

She says that another part of the debate which is of equal importance is the reduction in the carbon footprint.

Scottish Widows “firmly believes reducing the carbon footprint of its investments has the potential to deliver long-term positive investment outcomes, given the stance of regulators, governments and investors alike”.

Scottish Widows is not alone as a provider taking this issue very seriously and looking to make a significant impact through ESG strategies. For Dan Smith, head of workplace investing distribution at Fidelity International, climate change is “a very real issue”. 

He says: “Companies that have a strategy to reduce their carbon footprint and move to a net zero world can ultimately be the most successful businesses over the long term, within their respective sectors.

“Fidelity engages with these companies on behalf of our clients to ensure ESG is embedded into their strategies when choosing which companies to invest in.”

Ryan Medlock, Royal London’s senior investment development manager, says providers and asset managers should all now have a net zero transition plan.

“Royal London, like many other providers, has signed up to Paris-aligned targets. This impacts the investment strategy of pension funds.

“Climate outcomes are now built into our modelling, alongside risk and return, when considering the asset allocation and underlying investments held within our default investment strategy.”

He says that investing is also linked to government policy: “If policy were, for example, to disincentivise pollution through taxes or pricing carbon, investment in these companies would become less attractive.”

As such, government policies in this area have a significant effect on what providers choose to invest in.

“Asset managers have to balance the risks of government policy impacting their portfolios as well as ensuring they are aligned to members’ preferences.”

The value of behavioural changes

For Brian Henderson, partner and head of sustainable investment at Mercer, the regulation around climate change and pension fund investing has “played its part”.

He says: “The UK Climate Change-Related Disclosures has focused the minds of more than £5bn of funds, with more than £1bn following now. 

“In looking at how schemes consider climate and their associated risks both in terms of investment, funding and for defined contribution pot size, we now see evidence of action towards assets that will help reduce carbon dioxide in the pension scheme.”

Companies that have a strategy to reduce their carbon footprint and move to a net zero world can ultimately be the most successful businesses over the long term.Dan Smith, Fidelity International

Henderson adds that as this is a risk, it is something that needs to be managed, like all risks. 

“Until very recently, it has been and continues to be, difficult to quantify these risks, but we are slowly seeing better metrics becoming available.”

He mentions, however, that reducing carbon dioxide from the pension scheme may just shift the problem elsewhere instead of keeping carbon dioxide figures down altogether.

“Of course, reducing carbon dioxide from the pension scheme may just move the problem to someone else if selling in public markets, so other more direct approaches are starting to evolve through private markets, as well as using stewardship to force change in corporate behaviours.”

According to Nazarova-Doyle, transitioning to achieve net zero in the near term, with the aim of averting the worst effects of climate change, has the potential to impact investment value both positively and negatively.

“This is because companies which can’t amend their businesses to be less carbon-intensive, or are slow to do so, will likely see their value negatively affected. 

“Equally, companies that take advantage of opportunities such as the technologies and infrastructure needed to deliver the low-carbon transition, and those with ‘green’ credentials, could be more heavily favoured by investors and see their values rise.”

She adds that managing the risks of climate change – as well as seizing the opportunities in investments – will be vital to safeguard customers’ long-term savings.

Ruth Gillbe is a freelance journalist