Investment in countries, companies and communities whether through equity, government or corporate debt markets, provides important capital to innovate, build infrastructure, support climate change transformation or simply grow businesses and create employment. This all has an impact on people and local communities around the world.

Rachel Pether, of the Sovereign Wealth Fund Institute, representing Sovereign Wealth Funds with AUM of $8.3 trillion, says “the world’s global asset managers are unified in the sole goal of investing responsibly and in making a collaborative contribution to transforming the world to a low carbon net zero planet”.

The ‘G’ – A major influence of change

In the equity and corporate debt world, change is influenced by the people that run companies – the management. Boards of directors are judged not just on the profit they make but also on how they:

• Use their capital
• Treat their employees, suppliers and stakeholders
• Work with local communities
• Act responsibly in the way they operate and treat Mother Earth (the environment).

Boards of companies will increasingly be assessed and judged not just on ‘what’ they deliver through long term shareholder value but also on ‘how’ they do that; the ‘how’ as much as the ‘what’.

For example, the extent to which climate change transformation leads to the genuine maximisation in the reduction in the absolute level of emissions before the use of negative emissions, like forestry, as offsets.

‘No’ to shuffling of deck chairs

A real measure of global success will be the aggregate absolute reduction in emissions across all asset classes ‘before’ the offset of negative emissions – and the ‘real ratio of change’ between the absolute reduction compared to credits used. The question is what global ‘real ratio of change’ would be considered a good outcome.

A poor outcome would be ‘a shuffling of deck chairs’ – with the ‘transfer’ of carbon-intensive assets to private markets and a ‘re-allocation’ of the ownership of forestry, as credits, to reduce residual emissions.

Generating returns to deliver benefits

To generate the returns that are needed to deliver the benefits for members, trustees will continue to need asset managers with investable universes that offer the right level of diversification and choice for stock selection within private, as well as, public markets.

UK defined benefit plans put nearly one-quarter of their assets into alternatives, which is the asset class that could potentially deliver the greatest level of change through innovation, and the development of enablers for climate change: renewable energy infrastructure, social housing, forestry, urban regeneration, regional small and mid-size enterprise (SME) financing, and tech-for-good.

Dame Elizabeth Corley, Chair of the Impact Investing Institute, said: “The importance of the role of pension funds in stimulating greater corporate accountability for outcomes beyond financials cannot be over-stated. There is growing recognition that companies have much greater responsibilities towards society and the planet than are routinely acknowledged and that equity owners play a crucial role in holding management to account.”

Within the investment process, environmental, social and governance (ESG) factors and climate change transformation will be assessed by a suite of metrics that will continue to evolve and improve as asset owners identify metrics that more closely correlate with the outcomes they want to see.

This also means that, while respecting trustees’ fiduciary obligations, the ‘impact’ we make will be increasingly important alongside the returns we generate. The outcomes we deliver and the extent to which we can encourage genuine engagement will define our true ability to act in customers and pension scheme members’ best interests, as will the way we communicate it to members and customers in an everyday language they understand, enabling them to join in a two-way conversation.

The Department for Work and Pensions (DWP) have recently launched an excellent nationwide initiative, the Occupational Pensions Stewardship Council, to bring together trustees and pension funds, of all sizes, to create a collaborative hub to share best practice and learnings, and develop efficiencies around stewardship, with the ability to work together, using scale for good, in engagement and voting opportunities.

Learning environment

As we enter perhaps one of the greatest tests of time, there’s never been a more important role for pension fund trustees to consider and understand the future impact of the trillions of UK pension scheme members’ money that is invested on their behalf – to deliver the right outcomes for future generations.

With the expected pace of change, it will, therefore, be important for trustee boards to create the right learning environment, and to maintain the right level of knowledge and understanding, to enable them to make the right choices.

Guy Opperman, the Pensions Minister, said “An important part of Trustees’ knowledge and understanding must include an understanding of the risks and opportunities of climate change on members’ savings. Climate change will have a long lasting impact on our planet and future retirement incomes, for generations to come. Trustees have a responsibility to do the right thing for their members and an opportunity to support the UK to be a global leader in the most important issue of our time”.

The Pensions Management Institute, the UK’s largest recognised professional body for pensions professionals, will continue to lead by developing its training and qualifications to support the industry and its professionals, on climate as part of ESG, in delivering for pension scheme members.