ShareAction CEO calls for continued regulatory pressure on pension schemes.
Two of the UK’s largest pension schemes expect further shifts in valuations and greater engagement with carbon-intensive investee firms in order to fulfil their net-zero investment commitments. The CEOs of Nest and the BT Pension Scheme (BTPS) were speaking at a pre-COP26 panel discussion at the Pensions and Lifetime Savings Association (PLSA) Annual Conference.
“Even over the next five years, we expect to see a change in valuation for some sectors of the global economy due to climate risk,” said Helen Dean, CEO at UK auto-enrolment workplace pension scheme Nest. Carbon-intensive industries such as oil and gas, chemicals and plastics are among those most at risk, she said.
Half of the workplace pension scheme’s overall £20 billion in assets are now invested in “climate aware funds”, achieving an impact equivalent of taking 375,000 cars off the road, Dean noted.
Morten Nilsson, CEO of BTPS, said the scheme has also adjusted its portfolio in line with net-zero goals. Last year, BTPS committed to net-zero greenhouse gas emissions across its £55 billion portfolio by 2035, by which time almost all of the scheme’s current members are expected to be retired.
BTPS’ investment strategy is to focus on bonds and secure income assets in companies that have lower emissions or offer transition solutions. The scheme also requires its asset managers to report again a net-zero scorecard, which will be assessed annually.
“Over the next 15 years, we will be reinvesting the majority of our assets more sustainably,” he said.
Two recent surveys have highlighted that institutional investors in Europe are more focused on climate risk than those in other regions.
The RBC Global Asset Management (GAM) 2021 Responsible Investment Survey, which interviewed a variety of investors, including pension plan sponsors, investment managers, insurers, charities and more, noted that around 80% of European investors’ investment policies address climate risk (a 15-percentage-point growth on last year), compared to 20% in the US, 30% in Canada and 32% in Asia.
A survey of almost 180 asset owner professionals by FTSE Russell highlighted that 77% of European respondents said their priority focus area for sustainable investing is climate and carbon, compared to 58% of Asia Pacific respondents and 56% of North American respondents.
Opportunities and engagement
Both UK pension schemes are looking for sustainable investment opportunities in green technologies, such as hydrogen and carbon capture, utilisation and storage (CCUS).
In March, Nest appointed Octopus Renewables, part of Octopus Group, to boost its exposure to clean energy infrastructure. As one of the largest investors in utility scale solar power in Europe, Octopus Renewables will use to mandate to target renewable energy projects and associated infrastructure across the UK and Europe.
However, Nilsson noted that the supply of new technology solutions is limited compared to demand, “making the current prices quite hard to accept”.
“Consistent UK government policies supported by cross-party consensus would open up more opportunities, which would fuel supply and help prevent a green asset bubble,” he added.
Nilsson flagged the heavy concentration of climate risks to BTPS caused by a small number of carbon-intensive firms. Around 80% of the BT Pension Scheme’s emissions come from 20% of its corporate bond and equity portfolios, of which half come from just six companies.
“Unsurprisingly, these companies span oil and gas and chemicals,” Nilsson said. BTPS has chosen to engage with these companies in order to encourage alignment with their net-zero targets, rather than immediately divesting.
Engagement over divestment is the preferred strategy for both Nest and BTPS, partly because divestment risks those assets being bought up by less responsibly-minded investors, leaving directors less compelled to contribute to a worldwide reduction in emissions.
“We support shareholder resolutions that call for better disclosure of climate risk, and we will vote against companies who have not made sufficient progress,” said Dean.
She noted that Nest will also engage a company on its lobbying behaviour if it is not consistent with its public position on climate change.
“Divestment will not reduce global emissions,” said Nilsson. “If high-emitting companies are convinced to change their business models and decarbonise, it will have a greater impact and do more for the overall trajectory to net-zero than just investing in low-emitters.”
To continue ensuring pensions are making progress on their journey to net-zero, UK regulators and policymakers need to “maintain pressure”, said Catherine Howarth, CEO of NGO ShareAction.
Around 49% of European investors said that the focus on climate-related risks is largely due to an increase in regulation, such as the EU Taxonomy Regulation, according to the RBC report.
In the UK, regulations are also in place to encourage reporting and awareness of climate risks.
The largest UK pension funds are finalising their mandated Task Force on Climate-related Financial Disclosure-aligned (TCFD) reports, in which they must outline the approach to climate across the framework’s four main pillars: governance; strategy; risk management; and metrics and targets.
The majority of UK defined benefit (DB) and defined contribution (DC) pension schemes think that TCFD-aligned reporting will be beneficial in the future, according to a new report by the Confederation of British Industry (CBI) and Mercer.
Operators of DC schemes (47%) said that TCFD-aligned reporting will be a useful way to engage employees on their future savings, and operators of DB schemes (43%) said that it will be beneficial for the employee value proposition.
“It has paid to pollute for a very long time. Beyond voluntary action, at COP26 we need policymakers to change the rules of the game and for regulators to ensure pension funds are moving forward and bending the curve of emissions production,” said Howarth.
Earlier this week, the Make My Money Matter campaign called on the UK government to make net-zero commitments mandatory for all pension funds and the wider finance sector through legislation.