COP26 has come to an end and, going forward into 2022, many pension scheme trustees may be asking what the outcome of the conference means for them. As a key player in the industry, pension funds have a huge role to play in influencing the direction of financial services and investment portfolios towards more sustainable and climate-friendly channels. Here, we set out some of the key takeaways for trustees to be aware of going forward from COP26.
12% improvement in net zero commitments
According to Aviva Investors' recent Real Assets Study 2021, 50% of pension funds globally have committed to ensuring their portfolios are at net zero emissions by 2050 following COP26, up 12% from the previous year. 67% of pension funds have also now made some kind of net zero commitment, which represents an increase of 20% from last year.
Such targets are not without their challenges, which is acknowledged by the report. In particular, the popularity of infrastructure as a stable investment choice, given the significant costs attached to improving environmental credentials within the carbon-intensive real estate industry on top of already costly materials and labour expenses, presents an obstacle to sustainability.
Other barriers faced by pension funds include the exceptional popularity of green infrastructure assets, as compared to limited availability, according to David Russell of USS Investment Management (speaking at the Responsible Asset Owners Global Symposium, Europe 2021 conference). Further, other entities such as listed companies are also looking to acquire assets from this small pool, making competition for investment (particularly for smaller schemes) high.
However, these figures are undeniably a positive sign and demonstrate that net zero is something which is both being taken seriously and being addressed head-on by pension scheme trustees. However, more needs to be done by more pension schemes, as is clear from the figures above.
Increased regulatory burdens for trustees
The months preceding COP26 saw a flurry of new regulatory developments announced around climate change and pension scheme governance. Regulations under the Pension Schemes Act 2021 have brought in new climate change governance and reporting requirements for trustees (for further detail see our previous blog) and a host of other bodies including the International Monetary Fund, the Treasury and the Work and Pensions Committee have published reports and recommendations around stewardship and greening finance (again, set out in our most recent blog).
Concerns have emerged in the industry that this ever-increasing regulatory burden may deter prospective trustees from taking on the role, and indeed may lead to existing trustees resigning from their position. The Association of Consulting Actuaries' recent pension trends survey found that 76% of employers fear the resignation of their trustees in the face of growing governance requirements. Sole trustee structures appear to be an attractive solution, with 19% of employers surveyed considering adopting this.
Whilst clearly trustees should be aiming to keep on top of emerging regulatory developments, we can assist trustees with ensuring they are well placed to meet their obligations in terms of environmental and social governance and reporting requirements. We are well versed in helping trustees manage these ever-increasing regulatory obligations whilst at the same time shouldering some of their legal burden. If you would like advice on complying with your legal obligations as trustee(s), please get in touch with the pensions team (you can find contact details at the end of this blog).
Importance of the pensions industry in attaining climate objectives
What is clear following COP26 is just how vital the pensions industry will be in reaching the climate goals set out in the Paris Agreement. UK pension funds control over £2.5 trillion of assets, and thus their capacity to influence and drive change towards a more sustainable, climate conscious investment landscape is significant.
Climate consciousness is also important in terms of the responsibility trustees have towards the scheme members whose funds they manage. Climate change has already shown it has the potential to impact and destabilise every area of society, and investment portfolios are no exception. The long-term risks posed to pension fund assets are unpredictable and likely to be severe; by making more sustainable choices, trustees can act to mitigate this and in so doing fulfil their fiduciary duties to scheme members. Research also shows that such considerations are important to scheme members (for example, a recent study by Cushon found that 60% of millennials want sustainable pension investment).
To round up the general consensus coming from the pensions industry during and following COP26 – whilst much progress has been made, more needs to be done by all areas of society to reduce emissions and tackle climate change. The pensions industry must play its part, both by using its influence to encourage investees to make more sustainable choices, and by investing pension scheme assets to finance the necessary solutions to the climate crisis.
If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team, or your usual Brodies contact.