The government has committed to net zero by 2050, and it is clear that pension schemes have a significant role to play in the financial industry in terms of moving capital away from investments that have a detrimental impact on net zero goals to those where it can have a positive impact. With significant regulatory changes on the horizon for pension schemes, which will seek to force a certain level of environmental compliance by requiring trustees to consider their green investment strategy more pervasively, trustees are faced with the challenge of navigating these changes and ensuring they are best placed to align schemes with environmental goals.
One key way that schemes can prepare themselves for shifting regulatory frameworks is to consider their independent environmental policy. Commentators note that, in the interests of stewardship, this should be done in consultation with members. Whilst trustees are ultimately responsible for making decisions, they should still act in the best interests of the beneficiaries – engagement with members is central to this. How a scheme goes about engaging with members over their environmental policy depends on the size of the relevant scheme i.e. a smaller scheme may be able to host a meeting for members to discuss environmental policy, whereas a larger scheme may conduct a survey to gauge opinions on green investments.
Funds that engage investment managers to manage the investment portfolio are not excluded from utilising a clear environmental policy. Experts in the pensions industry note that the opportunities for trustees to implement their policies with investment managers is growing and, by developing their own policy, they will have a clear benchmark against which to monitor each investment manager’s strategy.
In terms of investments, commentators note that integration and engagement with the companies in which investments are made is fundamental to robust investment management. Whilst divestment from environmentally detrimental assets is important, and indeed being encouraged by the government, engaging with global companies that will have an impact on transporting the world to net zero, and encouraging them to improve their practices, can drive positive change. It has been noted that the actual impact of divestment can often be ineffective in moving capital away from these detrimental assets, due to the fact that when market sentiment shifts against a bad practitioner they become cheaper for investors. Divestment and exclusions should therefore be used to avoid the worst offenders.
With COP26 highlighting the changing fiscal priorities at a global level, pension schemes should act now to prepare themselves by engaging with members and companies, and creating and implementing a clear environmental policy. However, it has been reported that employers are concerned about trustee capacity levels in the face of increased legislative and regulatory requirements. Climate change considerations will therefore be competing for space alongside various other responsibilities being taken on by trustees across the pensions industry.