The “number one issue for every scheme”. At least that’s what Pensions Minister, Guy Opperman, felt back in March at the PLSA Investment Conference when the consultation on aligning pension schemes to the Task Force on Climate-related Financial Disclosures (TCFD) was launched. Thanks to Covid-19, lockdown and the need to deal with more immediate issues, that seems a long time ago now.
Still, climate change was on everyone’s lips and the UK government is still committed to net zero carbon emissions by 2050. A few weeks (or, depending where you are, months) into lockdown and all of us are breathing cleaner air now, including in China…
What should trustees be doing?
At the moment, investment decisions consider both immediate concerns about shares affected by the Covid-19 crisis and a longer term view as to which will recover best from the anticipated recession as industry slowly opens up after coronavirus restrictions. However, pension trustees will need to review environmental, social and governance (ESG) engagement implementation plans for publication after 1 October 2020 with an eye to the consultation. While TCFD-aligned disclosures are currently voluntary, amendments to the Pension Schemes Bill during its progress through Parliament will introduce a regulatory stick to make them mandatory.
The consultation drafted by the Pensions Climate Risk Industry Group (PCRIG) helpfully includes searching questions pension trustees can ask their fund managers about how they are assessing ESG risk. Trustees will look to their fund managers to perform scenario analysis on their portfolios allowing for varying rates of adoption of the Paris Agreement from five years ago.
Furthermore, pension trustees are expected to set metrics to manage climate-related risks, as well as keeping records on engagement with shareholdings and voting. I expect trustees will focus on the so-called ‘sin’ shares, as well as development of a carbon journey plan for defined benefit (DB) schemes. Member choice will need reassessment in defined contribution (DC) pension schemes too.
Is ESG more important now?
We are all wondering about improvements in environmentally friendly working practices that may be optimised after the coronavirus crisis to help keep pollution low for ours and future generations. I can’t think of a time when engagement has been more important than now to establish mission and beliefs around climate - the ‘e’ in ESG.
Pension trustees can analyse the ‘s’ in part by looking at how well companies whose shares are held by the pension scheme have dealt with their staff during this crisis - and the ‘g’ too through each boards’ decision making governance. Did you see last week a leading fund manager reported higher rated ESG shares had outperformed the rest of the market lately?
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