PLSA Report Helps UK Pension Funds to Embrace ‘Climate-Aware’ Investment

Seven-step plan aims to eliminate barriers caused by absence of definitions, data and expertise.

A new report from the Pensions and Lifetime Savings Association (PLSA) aims to help UK pension funds to overcome barriers currently preventing them from adopting investment strategies to minimise climate change.

“No one benefits from blocking climate-aware investment,” said PLSA Chair Richard Butcher, laying out the PLSA’s seven-step plan to support pension schemes at the association’s annual conference.

The report, titled ‘A Changing Climate: How Pension Funds Can Invest for the Future’, follows a major consultation exercise which revealed a strong appetite to invest to achieve a transition to a low-carbon economy, but also highlighted issues faced by PLSA delegates in their efforts to move towards greener investments.

A series of roundtables conducted by the PLSA found that even a minority of sceptics supported the consensus view that climate change, man-made or not, posed a threat to their portfolios. In terms of obstacles to the development of climate-aware investment strategies, the report highlighted a lack of consistent definitions and high-quality data on which to base climate-aware investment decisions, as well as a need for greater climate-related knowledge and expertise in pension funds, with particular emphasis on trustee boards.

To remedy these shortcomings, the PLSA intends to work with bodies including The Pensions Regulator and the Financial Conduct Authority to encourage the development of ESG-related training. It will also lobby for widespread adoption of the recommendations of the Task Force for Climate-Related Disclosures and support measures to increase equivalence of climate reporting or regulatory obligations.

To clarify definitions, the PLSA recommends a joint-industry and governmental review to examine competing standards and definitions, as well as existing initiatives to achieve harmonisation, with the aim of identifying a framework to achieve a common language and taxonomy ahead of next year’s COP26 conference.

Rachel Brothwood, Director of Pensions at West Midlands Pension Fund, highlighted the importance of high-quality data, both in terms of managing climate risks in portfolios and communicating to pensioners.

“We want simple communications, but we haven’t got a lot of the data, evidence and frameworks that can give us the answers at this stage. We need to ensure that the frameworks and investor tools are developed so that we can meaningfully report outcomes and demonstrate to our members that these strategies are making a difference,” she said.

To help schemes articulate climate-related requirements more explicitly to fund managers and other suppliers, the PLSA said it will work with the International Corporate Governance Network in revising and renewing its model mandate and produce guidance, templates and best practice material for members and trustees.

The association will also support climate stewardship by developing guidance for members on good practice expectations on stewardship services and encouraging schemes and managers to adopt its Stewardship Code and participate proactively in industry stewardship initiatives.

Speaking at the conference, Tony Burdon, CEO of Make Money Matter, said “the climate emergency represents a huge threat to returns” and encouraged PLSA members to view changes to pension scheme management as an aspect of climate mitigation, such as recycling or reducing household waste.

“This report highlights some of the barriers to climate aware investing – none of which are insurmountable – and proposes some actions to overcome them,” said Butcher. “The PLSA is here to help the pensions industry overcome the barriers and to work with others in the investment chain to deliver the essential changes.”

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