Data definitions, better stewardship, and increased education are central recommendations for overcoming the barriers to climate-aware investing, the Pensions and Lifetime Savings Association (PLSA) says.
A climate investment report published by the trade body yesterday (14 October) as part of its annual conference found "universal appetite" among schemes on the need for providers "to take climate change seriously and to invest with a sense that a carbon-constrained future is coming."
The PLSA has outlined key recommendations within the report to overcome some of the obstacles its research found, most notably "immature" infrastructure, inconsistent definitions and language, as well as poor-quality or insufficient data, and lack of necessary investment products.
Speaking in a panel discussion at PLSA's conference yesterday, PTL managing director and PLSA chair Richard Butcher said the trade body had spoken with many schemes which had ongoing data concerns preventing climate-conscious decision making.
The PLSA has also pointed to limited expertise and training on climate change issues across the investment chain, including among the senior decision-makers at pension schemes.
"We came across a lot of people who are struggling with some really tricky technical problems," Butcher said. "When I as a trustee ask somebody for an item of data and they decline to provide it, they're not trying to block me, it's just that nobody has ever asked them for that data item, and they may have no easy, inexpensive way of gathering it, but they do want to be able to gather it."
"In other cases, the issues are around structural challenges in the investment chain and the need for better alignment of duties and disclosures along it," the PLSA stated in the report. "Pension schemes cannot resolve these issues alone if they are to deliver the change that is necessary. A system-wide approach is needed."
Butcher added: "This report highlights some of the barriers to climate aware investing - none of which are insurmountable - and proposes some actions to overcome them."
He noted: "If we talk the same language and work to the same standards, it means that we're more than likely to understand each other and agree a common destination. And that means that we're more likely to get there."
The key PLSA recommendations to overcome the identified barriers were:
- Clarify definitions of climate-aware investment - A joint-industry/government review to examine the wide range of competing standards and definitions that currently exist is needed to identify a framework to achieve a common language and taxonomy ahead of COP26 .
- Address poor-quality climate data and information - The PLSA will encourage the government and regulators to move towards more widespread adoption of the Task Force on Climate-related Financial Disclosure's recommendations and support measures to increase equivalence of climate reporting or regulatory obligations from the top to the bottom of the investment chain.
- Provide greater climate expertise and education - The PLSA will encourage more industry-led ESG training and education, work with The Pensions Regulator to ensure guidance for schemes is suitable, and support the Financial Conduct Authority in working to design explicit climate conduct expectations.
- Articulate requirements more explicitly - The PLSA 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.
- Enable better climate stewardship - The PLSA will further develop its guidance for members on what good practice expectations ought to be with regard to stewardship services and continue to encourage schemes and managers to adopt the stewardship code, and to play a pro-active role in industry stewardship groups. It will also commit to working with the investment industry and regulators to find solutions to the challenges schemes face when exercising stewardship and voting ‘rights' in pooled funds.
- Improve the supply of appropriate climate products - The PLSA will continue to make the case to government for the issuance of a green gilt and work with the investment industry and regulators to develop principles for ESG asset management funds/products to adhere to on ESG generally, or specifically with regard to climate.
- Communicate and explaining climate-aware investment - The PLSA will explore the feasibility of creating a pension quality mark for ESG and build on its work on implementation statements to consider how best to support members in their communications with beneficiaries.
Butcher said: "We've spent a great deal of time talking to all parts of the pension investment chain about these barriers and, while some pension schemes are already taking a proactive and leading position on the subject, there is a genuine appetite throughout to address them and do more.
"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."
Panellist Rachel Brothwood, director of pensions at the West Midlands Pension Fund, said every pension fund "will need to assess what is right for them and their own governance budget" on addressing climate issues, "according to appetite, and ambition".
"At end of the day we have a job which is about protecting and enhancing asset values and paying pensions over the long term," she continued. "Climate doesn't just affect our investments in this in this sort of challenge. Effective and proportionate engagement between companies and policymakers and managers and membership is really important to ensure we can have collective and collaborative action which really drives change and meaningful outcomes."
Also speaking on the panel was Tony Burden, chief executive of the Make My Money Matter campaign co-founded earlier this year by film director and producer Richard Curtis.
"We need to see more pace in change in reducing emissions, but also to grow the portion of portfolio investment because of impact to mainstream ESG across the entire portfolio to become more active shareholders of the companies they invest in," Burdon said.
"We also need to engage with scheme members, and to respond when appropriate to their values and interest while noting that members are not investment experts."
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