Best Practice Guide Helps UK Pensions Achieve Climate Goals

PLSA provides opportunity for pension schemes to learn from peers when adopting strategies to align portfolios with the Paris Agreement.

The Pensions and Lifetime Savings Association (PLSA) has produced a new guide to help pension schemes meet climate goals in the run-up to COP26.

Towards a Greener Future: Case Studies from the Pension Sector’ sets out practical examples on how to meet a broad range of regulatory challenges and investment ambitions.

The aim is to help pension funds learn from others’ experiences in areas such as setting climate goals, gathering data, reporting against standards set by the Taskforce for Climate-Related Financial Disclosures (TCFD) and implementing investment strategies that align with the Paris Agreement.

Examples of best practice come from large schemes such as the BT Pension Scheme, Nest, Railpen and Brunel Pension Partnership, but also smaller providers.

USS Investment Management, the wholly-owned investment management arm of the Universities Superannuation Scheme, which announced its first exclusions policy last year, contributed an article highlighting the evolution of its approach to managing climate-related risks to its portfolio.

“We undertook financial analysis to determine whether certain ESG factors had been properly priced into those sectors that we thought were most vulnerable,” wrote David Russell, Head of Responsible at USS Investment Management, said. “As a result of this, we announced plans to exclude and ultimately divest from tobacco manufacturing, thermal coal mining, (specifically where this activity is more than 25% of a company’s revenue) and companies that may have ties to certain controversial weapons.”

Separately, Scottish Widows outlined its three key decarbonisation goals: a 2025 target of increasing investments in climate solutions; a 2030 target of halving the carbon footprint of its total investment portfolio; and a 2050 target of net zero across the entirety of Scottish Widows’ investments.

“We have already taken significant steps in achieving these goals and making sure that our portfolios are moving to be aligned with the Paris Climate Agreement. Last year, we integrated ESG considerations into our multi-asset portfolios by investing in the new BlackRock ACS Climate Transition World Equity Fund, which we designed in collaboration with BlackRock,” wrote Maria Nazarova-Doyle, Head of Pension Investments and Responsible Investment at Scottish Widows.

“The fund focuses on companies that are decreasing carbon emissions, increasing clean technology revenue, reducing water consumption and improving waste management. In addition to this, we have relaunched the Scottish Widows Environmental Fund, which is now fully fossil-fuel-free and invests in UK companies that are making a positive environmental impact. As well as investing more in environmentally sound companies, we have also disinvested around £1.4 billion from companies that are not compatible with our sustainability goals.”

Practical guidance

Nigel Peaple, Director of Policy and Advocacy, PLSA, said: “The pension sector is united in its desire to tackle climate change and, in advance of new TCFD requirements, large pension schemes are already assessing the impact of their investments in order to adopt strategies which will help to reduce climate change and achieve the goals of the Paris agreement.

“Our new guide, ‘Towards a Greener Future’, sets out case studies on how pension schemes and providers are approaching this issue in practical terms. Many of these are from schemes that have been leading the way on investing in a climate aware way. This is a complex area, and we hope that pensions trustees and schemes find our new guide useful whatever the stage they are up to in dealing with climate change.”

In June, the PLSA proposed a new Responsible Investment Quality Mark intended to bring a number of regulatory and stewardship initiatives together and recognise pension schemes that meet the highest standards for incorporating environmental, social and governance (ESG) factors across their operations. The Association also held its first dedicated ESG Conference, to bring members of the industry together to learn from experts and share experience between pension providers and other stakeholders.

In October last year, the PLSA  also published ‘A Changing Climate: How Pension Funds Can Invest for the Future’, which identified barriers that prevent pension funds from fully embracing climate-aware investment and made 15 recommendations to address them. Many of these recommendations have in the last 12 months already come to fruition.

Earlier this week, research by the Make My Money Matter campaign said three quarters of the UK’s largest pension schemes are failing to make robust net-zero greenhouse gas emissions commitments.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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