Asset owners are increasing pressure on carbon-intensive corporates, but divestment should be last resort.
Investors need to outline clear expectations to investee companies in order to accelerate the transition to net zero emissions by 2050, according to Katharina Lindmeier, Responsible Investment Manager for government-backed workplace pension scheme provider National Employment Savings Trust (Nest).
Managing over £10 billion in assets under management (AUM) with more than a third of members aged between 25 and 34 (and just 1% in the over 65 category), Lindmeier noted that pension fund choices offered by Nest are designed with a post-2050 world in mind. Managing climate risk and investing in greener opportunities are therefore high priorities.
Lindmeier sat on a panel at the UK Sustainable Investment and Finance Association’s (UK SIF) London Conference, discussing the role of UK pensions schemes in achieving net zero emissions targets. Panellists agreed that asset owners need to do more to hold investee companies accountable in the race to zero as demand for more sustainable pensions rises.
“The vast majority of our members are going to be retired after 2050, so addressing climate risk and encouraging companies to transition to net zero targets – particularly carbon-intensive companies – will improve their overall quality of life beyond just the money they get out of their pension,” Lindmeier said.
“Escalating engagement strategy”
Daisy Streatfeild, Investor Practices Programme Director and Chair of the Institutional Investors Group on Climate Change (IIGCC) argued that divestment should be a “last ditch attempt” to encourage companies to align with net zero emissions targets.
“Divestment is an important tool in the toolbox for investors. At IIGCC, we recommend our members have an escalating engagement strategy for companies that are not aligning with net zero targets, and ultimately the final decision would potentially be divestment if it looks like the company is not responding to its shareholders,” Streatfeild explained.
Nest has implemented a “clear engagement escalation process”, Lindmeier noted, using shareholder voting rights to encourage investee companies to more actively transition to net zero. Earlier this year, the pension provider pledged it would shift £5.5 billion of equity into green industries and begin divesting from companies involved in the likes of arctic drilling or coal mining by 2025.
However, carbon-intensive companies that disclose a clear progression plan towards net zero emissions targets, halting carbon-intensive practices by 2030, will not be subjected to such harsh measures.
Lindmeier said Nest is working with companies at risk of divestment to enforce the required changes before 2025, but that “there is an endpoint where, if companies aren’t moving in the right direction, divestment will be used as a last resort”.
The direction of regulatory travel
Streatfeild said investors have a responsibility to understand regulatory changes and to continuously engage with policymakers, corporates and other asset owners on sustainability issues. “It is vital investors recognise the level of influence they have to encourage the transition to net zero emissions,” Streatfeild said.
IIGCC members (global investors managing US$9 trillion AUM) recently published a public letter to 36 of Europe’s most carbon-intensive corporates, demanding that climate-risk disclosures be included in all financial reporting. The letter included the IIGCC’s ‘Investor Expectations for Paris-aligned Accounts’ report, which highlighted five key changes these investors want companies to consider when reflecting the full scope of climate risks in financial statements.
Lindmeier agreed that a Paris-aligned portfolio is in the best interest of UK pension providers in the long-term, and that all investors need to increasingly hold companies accountable. “If enough investors do that, there will come a point where carbon-intensive companies will find it much harder to access capital.”
UK pension schemes have mere months to assess their exposures to climate risk, following the Chancellor of the Exchequer’s announcement last month that all climate-related disclosures will become mandatory for pension funds as early as 2021. The UK will be the first G20 country to make such a commitment to the guidelines outlined by Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).