Natalie Jackson discusses Climate Change and the Impact on Pensions | Asset TV

GEFI’s Natalie Jackson appeared on Asset TV as part of a panel of experts discuss the impact of climate change on pensions.

The discussion focused on the implications of COP26, regulation and investment solutions, and the challenges and opportunities they present. The discussion included some of the reports GEFI has recently released in this area, including the policy positioning paper setting out the key challenges faced by pension funds in their net zero journey and the transition roadmap paper providing practical steps pension funds can take to overcome the key challenges as well as set and deliver on net zero commitments.

The panellists were:

  • Hilkka Komulainen, Head of Responsible Investment, Aegon UK
  • Graeme Griffiths, Trustee, Aegon Master Trust
  • Natalie Jackson, Executive Manager, Global Ethical Finance Initiative
  • Mark Irish, Deputy Head of ESG Consulting, ISIO

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Net Zero Pensions at COP26

The risk posed to society by climate change is undeniable. If we fail to limit global warming to below 1.5°C, as agreed at the Paris climate summit in 2015, catastrophic effects will be felt across the globe especially to those who are most vulnerable. US climate envoy John Kerry stated earlier this year that COP26 would be the "the last best chance" to avert the worst environmental consequences for the world.

The pledges made during COP26 could limit global warming to 1.8°C1 and the commitment of international financial companies through the Glasgow Financial Alliance for Net Zero (GFANZ) to $130 trillion of private sector capital to achieve net zero by 2050 are encouraging but the implementation of these pledges and commitments will be the key if we are to meet the Paris Agreement.

The whole economy depends on achieving net zero by 2050 or sooner but pension funds could play a fundamental role in shifting the economy to protecting the planet, even if governments fail to act.

During COP26 at an event hosted at Glasgow University by the Global Ethical Finance Initiative (GEFI), senior representatives from pension funds and asset management came together to discuss net zero pensions. The event was opened with a keynote address from Ivan McKee, Scottish Government’s Minister for Business, Trade, Tourism and Enterprise who noted Scotland’s long history in the pensions industry, with the first mutual life office opened in 1815. He also noted that Edinburgh is now the biggest employer in the UK for jobs in the pensions sector. He highlighted Scotland’s commitment to combatting climate change, being one of the first countries in world to declare a climate emergency, and the need for private sector investment. He stated the ambition for “Scotland to be a superpower when it comes to ESG investment.”

Pension funds are stewards of assets

There was a challenge for pension funds to consider stewardship at the heart of their approach and to invest in a planet that is worth living on. The importance of pension funds playing a role in combatting the climate emergency was highlighted by Faith Ward, Chair of the global body leading change in the sector, the International Investors Group on Climate Change (IIGCC) and also Chief Responsible Investment Officer at one of the biggest UK public sector pensions schemes, Brunel Pension Partnership.  She addressed the fears of some pension trustees who see their fiduciary duty as maximising returns by stating that there will be “no fiduciary duty if there is no functioning society or economy”. Pension funds must be active owners of companies to make sure that they decarbonise their operations rather than jettisoning carbon intensive companies from their portfolios allowing big emitters to carry on driving global warming.

Collaboration is key

There needs to be collaboration between government, regulators and industry to deliver on net zero commitments - it will be challenging for pension funds to achieve net zero without collaboration.

During the event, there was a call to government to use regulation and legislation to incentivise   investment in companies that are part of the solutions to climate change rather than part of the problem.

It was highlighted that it is important for asset owners like pension funds to work together through groups such as IIGCC, a membership body with over 360 investor members with €49 trillion in assets   and ClimateAction100+, an initiative for asset owners to engage with the world’s largest corporate greenhouse gas emitters to take necessary action on climate change. Tim Orton, Managing Director of Investment Solutions at Aegon UK stated that “getting to net zero is not a competitive sport it is an imperative.”

Pension funds working with their asset managers to deliver net zero is also fundamental to amplify the change. Faith Ward highlighted that Brunel Pension Partnership has a formal policy on climate change that clearly sets out the expectations for their asset managers.

Net zero is a transition to a destination rather than a quick fix

Reaching net zero by 2050 will be challenging – many pension funds who embark on the journey to deliver a net zero commitment do not necessarily know exactly how they are going to get there. Making a commitment is a signal to the market of the direction of travel. Barry O’Dwyer, CEO of Royal London, observed that the transition to net zero is unlikely to be quick and it needs to happen in a just and equitable way, this was reiterated by Faith Ward who stated that social impacts alongside climate impacts must be considered.

Action must start now

Although there are still challenges to be overcome, sufficient tools exist for pension funds to start taking action now to deliver net zero by 2050 or earlier. The IIGCC’s net zero framework provides a comprehensive strategy for asset owners to deliver on their net zero commitments. Barry O’Dwyer stated that there was “no time to be passive”.

There are challenges still to be overcome

Challenges still exist around knowing how carbon intensive a portfolio is, expertise on climate change in pension funds, and trustees putting net zero at the centre of the governance of funds. David Russell, Head of Responsible Investment at USS, noted the progress that had been made in respect of data but this has predominantly been focused on public equities, access to data for sovereign debt and private markets remains a challenge. It is important to measure the baseline but also note where climate progress is expected and set milestones for companies. Eva Cairns, Head of Climate Change Strategy at abrdn, noted that temperature metrics alone do not tell the full story, other metrics are necessary to identify transition leaders. She also noted that abrdn were currently working on valuing and calculating avoided emissions.

Tim Orton noted that to achieve net zero we need different capabilities than we have had in the past and highlighted the importance of sustainability professionals and governance structures including steering groups on net zero.

Divestment versus engagement

Engagement was seen as a positive tool to drive decarbonisation in the real economy;  divesting from a high emitting company that someone else buys does not reduce their atmospheric emissions and that collective engagement through initiatives like ClimateAction100+ will drive change. It was stressed that engagement with high emitting companies must include measuring where they are now, where they need to go as well as recording the progress made. The Transition Pathway Initiative was identified as a useful tool to assess companies' preparedness for the transition to a low carbon economy.

GEFI has a dedicated net zero pensions workstream and has published two key reports on the topic, the policy positioning paper setting out the key challenges faced by pension funds in their net zero journey and the transition roadmap paper providing practical steps pension funds can take to overcome the key challenges as well as set and deliver on net zero commitments.

View all of the videos from our Path to COP26 programme at https://www.efx.global/cop26/.