Never has it been more apparent that we, as a financial services industry, need to take a bigger leadership role in helping society and contribute to mitigating climate and biodiversity risk.
I’ve mentioned previously that the financial services industry in the UK has a great position of responsibility given the industry’s world-standing by total assets. What this means, however, is that the industry is responsible for trillions of financed emissions – these are emissions linked to the investing and lending activities of financial institutions.
Quantifying these financed emissions and building credible plans towards net zero is a key step towards mitigating climate change, and developing risk management controls, which will be important for savers and pension scheme members alike.
Pension schemes are also driven by new regulation, such as the requirement to report on climate risks in line with the Task Force for Finance Related Financial Disclosures (TCFD) framework. In fact, in our recent survey of asset owners, regulation and government policy has the biggest influence on the development of sustainability strategies, cited by just under 80% of respondents. However, managing risk should be a key driver in the development of sustainable approaches because climate challenges create risks to companies, sectors, countries and to financial markets. Encouragingly, in our survey, 38% of respondents cited risk management as a key driver for sustainable policies, such as net zero.
Where are we today?
Many corporates globally are putting net zero plans in place and in the UK, pension schemes, for example, are well underway with their commitments. In a recent survey by the Pensions and Lifetime Savings Association (PLSA), six in ten pension schemes in the UK have net zero plans in place. Challenges in receiving like-for-like data from investee companies were still described as a concern.
The Net Zero Asset Managers Initiative also has more than 315 asset managers globally with US$59 trillion in assets who have committed to net zero alignment by 2050 or sooner. This also requires asset managers to review interim targets at least every five years, with a view to increasing the proportion of assets under management covered until 100% of assets are included. Signatories are also required to publish TCFD disclosures, including a climate action plan annually. This is an important step for pension schemes that will be expecting more alignment on net zero between themselves and their asset managers.
However, time is pressing.
Earlier this year, the Financial Conduct Authority said all financial firms should ‘push ahead with drawing up plans for transitioning to a net-zero economy’. Regulatory rules have been in place for UK asset managers with over £50bn in assets to report under the climate-related disclosure regime, based on the TCFD framework. Asset managers over £5bn are now in scope, although the first set of reports are not scheduled until summer 2024. Furthermore, a government-backed net-zero review mentioned earlier this year that ‘Plans to date based on the disclosures have varied in quality and lack detail on short-term actions to meet net-zero goals.’
This lack of evidence-based reporting to articulate how net zero goals are progressing is creating an information gap, yet good annual reporting and interim disclosures are an important step to determine if the direction of travel on net zero is broadly positive.
The absence of good quality information creates challenges for pension schemes that might have, or be considering, net zero targets. It means pension schemes and trustees should develop their own independent Governance, Strategy, Risk management, and Metrics & Targets frameworks around how they are going to capture information that helps them monitor their scheme’s net zero targets, and utilise this information in their stewardship activities with their asset managers.
So how can pension schemes start on their net zero journey?
Actionable plans on net zero
The first step for pension schemes is setting out a policy on net zero and determining data gaps, especially in measuring emissions performance from the segregated mandates or funds that make up their scheme’s portfolio. This requires access to data on Scope 1, Scope 2 and Scope 3 (if available) emissions – both at an aggregated level for each segregated mandate and fund, and at a security level. The latter will provide insight into the highest emitters, which could put the ability to meet net zero targets at risk.
Leveraging data solution providers, including custodian banks, for this data gives trustees the ability to make independent assessments of a scheme’s exposure to emissions and apply a more consistent approach to capturing this information across all asset managers. It will make the process more efficient and will strengthen governance around net zero.
Pension schemes can only plan their net zero journey when they know their baselines, and set appropriate benchmarks. To this end, data will also help pension schemes set a baseline, so they can be more informed about how emissions across their portfolio change year by year.
Another important step is to assess the ambition of asset managers and their commitment to net zero. What are their targets, is emissions data available and how frequently are they evaluating these targets? For individual securities that have higher emissions, and no polices to align with net zero, how do these compare relative to their peers? Targets signify some level of commitment. However, commitments need to be credible, which requires some demonstration of how this ambition is being achieved, ideally on an annual basis. An independent review can help assess if there is alignment between the net zero goals of asset managers and the pension scheme. This step requires plenty of engagement, and I would recommend organising a series of questions to apply a consistent approach to this information gathering, which I’ve organised in the table below.
Do you have a net zero goal in place?
How are your net zero goals integrated into each of your mandates and funds? Do you track emissions across the mandates/funds you manage for us?
Does your net zero plan integrate the regular disclosure of emissions reductions targets?
Do you calculate a temperature alignment or implied temperature rise of the companies you invest into?
What’s your policy on companies that are not aligned to net zero?
With a framework, pension schemes and trustees can begin to make a comparison across the different asset managers to see if they are ‘achieving net zero’, are ‘aligned’, ‘aligning’, ‘committed to aligning’ and ‘not aligned’.
This can also form the basis of regular reviews and ongoing due diligence.
Context is also key. When pension schemes de-risk and move from equities to bonds, this can skew a scheme’s metrics on net-zero. This means developing a narrative for stakeholders and members becomes very important.
Stewardship on the rise
Pension schemes more broadly are becoming more active in their dialogues with asset managers, and this will be important on net zero. In our recent survey of asset owners, more than two-thirds (69.6%) of respondents said they had engaged or exited an asset manager because of its sustainability approach. Of those that had exited an asset manager, 45.9% had done so immediately when they became aware of an issue and 49.7% had left after attempting to engage. For those that had never exited, 70.9% said their attempts at engagement had worked.
The right insight remains key
Making data more meaningful to members is a key consideration, which means placing context and data in a terminology that everyone understands.
Furthermore, in my discussions with pension schemes and trustees, education also remains key, especially with the complexity of climate risk. You don’t need to be a climate scientist, but you need to know the right questions to ask, and to make sense of data. Only 20% of asset owner respondents in our survey felt they had the support and information they need to create a long-term strategy on sustainability. There is clearly more scope for insight and education.
 CACEIS/Funds Europe 2023 Survey – 270 asset owners
 PLSA Survey, 2023
 The Net Zero Asset Managers Initiative as at 30 June 2023