Climate change is widely recognised as the biggest threat the world will face over the coming century. The pensions industry has a valuable role to play in the fight to reverse or at least minimise the rises in global temperatures that are predicted. The UK government has put in place its own plans for the industry via the Green Finance Strategy and the Pensions Act 2021 which largely put the onus for achieving positive change onto Scheme trustees. The Green Finance Strategy is a response to the Paris Agreement. Trustees need to ensure green-house gas emissions are net zero by 2050. The Taskforce on Climate-Related Disclosures (TCFD) provides recommendations and a framework to ensure climate and environmental factors are fully integrated into mainstream financial decision-making across all sectors and asset classes. Meanwhile The Pension Schemes Act 2021 writes climate change into pensions law and helps to adapt the TCFD recommendations to make them relevant to trustee decision-making structures measuring progress via metrics and targets.

Nonetheless, above and beyond these government actions, there is plenty that the pensions industry can do itself to make a difference. This can be broken down into several key areas.

The first key area for the pensions industry to examine is that of transparency. There needs to be a real commitment from the industry to make it easier for consumers to identify what is and isn’t a green or sustainable investment. The terminology used itself makes this difficult to achieve; for example, what qualifies as “green”, what qualifies as “sustainable”? Are these words even fit for purpose? If not, how can the industry best achieve transparency for consumers? These are questions which the industry needs to think about.

The industry also needs to ensure that it doesn’t engage in so-called “green-washing” whereby misleading images and text can give the impression of companies or funds committed to positive change but whose actions are anything but. In order to achieve meaningful progress, consumers need to be able to trust that where a fund or investment is marketed as being beneficial against climate change that there is some agreed and reliable means by which this can be quantified so consumers can make decisions accordingly. It requires all industry participants to engage with a genuine commitment to seeking change and not necessarily to maximising profit. In France for example, one way of preventing greenwashing is the use of clear labels that designate the level of carbon impact that various investment products have.

The second area where the industry can make a major difference is that of investment itself, particularly where the decisions around what will or won’t be invested in are being made by big pension trustees and fund managers, as opposed to individual consumers. The pensions industry controls colossal amounts of capital which can be put to work in various ways. Clearly there is a primary obligation to ensure that pension holders achieve the best returns for investors, but beyond this, decisions can be taken which can impact the fight against climate change. Furthermore, being green doesn’t mean that investments will perform worse than their environmentally damaging equivalents. For instance, Morningstar, reported that green funds outperformed their standard counterparts by between 0.54 and 1.91%.

The most obvious means by which investment decisions can make a difference is to actively divest from big contributors to climate change such as the fossil-fuel industries, construction or air travel. For example, in 2020 the University of Oxford pledged to drop all fossil fuel companies from their £3 billion endowment. However, this may not always be the best tactic. Rather than blunt disinvestment, the industry can use its financial power to engage and select between individual companies or funds within sectors so that investment is driven towards those doing the most to change their practices from high-carbon to low-carbon emission activities. An oil company might be seen as an obvious “baddie” but if a particular oil company is using its profits from carbon-based activity to invest in renewables with the medium to long-term aim of moving entirely away from fossil-fuels and into renewables, then investing in that company may actually do more good in the long-run than putting the same money into a new company focussed on renewables from scratch. Research suggests big oil companies are unlikely to need to raise new financing in the foreseeable future as they have large cash reserves, so disinvestment may not, in and of itself, encourage change. The USS, (the UK’s largest university pension scheme) continues to invest in a number of fossil fuel companies saying they intend to engage with them as a “force for good”. This approach of engaging and rewarding existing companies seeking to change, and in the process punishing those who won’t change, has the potential to lead to positive results.

The option to focus investment on companies whose core activities may help fight climate change is also of clear potential value. For example, start-ups with technological solutions to major carbon contributors could be targeted, such as companies seeking to sell plant-based foods which have smaller carbon footprints than the meat industry, or companies developing ways of producing less CO2 during construction.

In addition to investment itself, the industry can play a role through active engagement to drive company/fund policies whether that be through voting and questioning at AGMs or ad hoc meetings with company boards and fund-managers.

They key factor when it comes to investment is to ensure that those who are responsible for making investment decisions actively consider climate change when making their decisions, and that it isn’t just an afterthought. Disappointingly, according to Redington’s 2021 sustainable investment survey, of 112 asset managers, managers engaged with fewer than 15% net zero portfolios, despite 63% committing to climate-change targets. Meanwhile only 11% followed through and addressed greenhouse gas emission protocol with companies. Furthermore, only 64% could provide an example where climate change had affected an investment in the previous 6 months. This suggests that despite much fine talk, at present the industry still isn’t treating the problem seriously enough.

Investors could use the Transition Pathway Initiative (TPI), which assesses sectors that contribute most significantly to greenhouse gas emissions, and currently provides assessments for about 300 publicly listed companies across 14 high carbon sectors. They could also encourage businesses to enrol in programmes such as the Science Based Targets initiative (SBTi) which uses green-house gas metrics to define rigorous, credible and meaningful portfolio decarbonization targets which can be used by companies across the whole economy to set targets.

Finally, there is the area of education and awareness. This links back to both the issue of transparency and also to that of investment decision-making. Research shows that key players in the pensions industry are making efforts to educate, for example, TPR have helped produce a road map for schemes for example, The Joint Forum on Actuarial Regulation (JFAR) has published a report to help actuaries mitigate risks. Make My Money Matter has a pre-written letter tool the public can use to ask pension providers to offer green pension funds. However, more is needed. The industry needs to ensure that climate awareness is something that all industry practitioners consider as a key factor in their work. This isn’t just a matter for senior decision-makers within companies but needs to extend down through all organisations at all levels. Much as increasing operational efficiency is viewed universally as a positive characteristic of employees at any level, companies could start treating climate-awareness in the same way. For example, HR departments could incorporate giving extra credit to interview responses which display that the candidate considers environmental matters in their day-to-day work, or managers could actively seek to promote employees that take action to reduce the carbon footprint of their own job roles. If action like this was coupled with internal training and education, over time companies might be able to develop in such a way that environmental awareness was thoroughly embedded within their corporate cultures. The more people thinking about how to reduce climate change, and the more people taking action to do so, the greater the chance of success.

In conclusion, although government action is a step in the right direction, on its own it is unlikely to yield the change necessary to prevent climate catastrophe. But by committing to honesty and transparency when it comes to climate issues, by pursuing investment policies which incorporate climate-impact into the decision making, and by developing corporate cultures which value employees committed to fighting climate change and educating all staff in such matters, the pensions industry can play a very significant role when it comes to fighting climate change.