Challenges remain for pension schemes in the transition towards net zero, despite consensus across the industry that this is a right way to progress.
Debating some of the potential pitfalls ahead at the Corporate Adviser Summit, Aon’s head of DC investments, James Monk said there was the danger that by focusing on reducing carbon emissions that portoflios become less diversified.
He says: “There is the danger for example that we may get a lot of portfolios that are heavily overweight in technology. Given the good performance of these stocks recently you could argue they are already over-valued and there is a the danger of a bubble.”
An investment strategy should take into account carbon emissions but investment decisions should not be made solely on this basis he adds. “It is not just looking at negative impact on an investment portfolio it is also about investing in positive climate solutions,” he says.
Legal & General head of DC client solutions says that one of the biggest challenges is to ensure that decisions made on a portfolio level also reflect “real world” reductions to emissions. He says the goal isn’t just to ‘green’ portfolios but to ensure business practices change, resulting in a real difference to carbon emissions and climate change.
“It is not about meeting a spurious target but about real world outcomes.” This will involve effective stewardship he says.
Chinnery says the real challenge for the industry was to start taking action and to “get on with the halving emissions by 2030”. He says this would involve action from providers, policy makers and government.
He adds that many of these challenges will come in the short-term, as consumers, savers and providers start to get to grips by what it might mean to transition towards a net zero economy.
Secondsight partner Mark Bingham says that here is still a relatively low level of demand for net zero pensions from employers and clients. “As far as employers are concerned this is another new thing for them to get their heads around.” He says many have other pressing issues to address, post-Covid, not least getting their workforces back into the office.
However the panel agreed there was likely to be more pressure from both members and employers for pensions that addressed this issue, but at the moment a lot of the engagement on this issue was being driven by brokers and consultants.
Bingham said that generally there was an alignment of interests between providers and employer and scheme members when it came to addressing the issue of climate change.
Monk agreed there was “limited engagement” from employers at present. But he said; “Many of the climate pledges made by providers are useful tools to help highlight this issue and initiative a discussion around what this might mean in terms of pension provision.”
There was debate about whether environmental considerations, particularly in relation to climate change, where dominating the ESG agenda. Monk says that while these had been the focus of regulation in this area he says it is not the only concern. “You could very easily argue that the ‘social’ factor can become financially material once it comes to light.”
Chinnery pointed out that work with Tumelo — the technology platform that allows pension scheme members to engage on a range of ESG issues — show the climate emergency is their biggest concerns. However he says this is closely followed by diversity.
“You can tell people get it. It is about building modern workplaces that work for everyone.”
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