UK Pension Funds Urged to Commit to Net Zero Before COP26

Hazel Bradford of Pensions & Investments reports that the largest UK pension funds are being urged to commit to net-zero before the next U.N. climate change conference:

Large U.K. pension funds should not wait for the upcoming U.N. climate change conference, known as COP26, to commit to net-zero targets for addressing climate change, the non-profit campaign Make My Money Matter said Thursday.

Make My Money Matter sent letters to 73 of the largest defined benefit funds in the U.K., including the £64 billion ($85 billion) Universities Superannuation Scheme, Liverpool, the pension fund for academic staff employed by British universities. Other recipients included The Natwest Group Pension Fund, Barclays Bank Retirement Fund, HSBC Bank Pension Scheme, BP Pension Fund, Shell Contributory Pension Fund, BBC Pension Scheme and Rolls-Royce Pension Schemes.

The letter asks them to commit to net-zero by using seven criteria that include:

  • Matching the 1.5 degrees Celsius ambition of the Paris Agreement and reaching full net-zero no later than 2050.
  • Rapidly exiting from all coal investments.
  • Active engagement and proxy voting with companies.
  • Divesting where necessary.
  • Investing in climate solutions.

A similar letter was sent to defined contribution trustees, encouraging them to commit to net-zero targets. Make My Money Matter CEO Tony Burdon said in a news release that the focus was broadened to the DB sector because it accounts for the large majority of the U.K.'s £2.6 trillion pension industry. "These schemes have extraordinary power to help tackle the climate crisis and protect savers' investments, but many have yet to respond to growing demand for cleaner, greener pensions," he said.

On May 19, the Make My Money Matter campaign kicked of the green pledge, "to ensure the £2.6 trillion in U.K. pensions builds a better world," by having pension fund officials and service providers commit to net-zero emissions targets before COP26 begins Oct. 31.

The group's website includes a quote from Mark Carney, the United Nations Envoy on Climate Action and Finance and former Bank of England governor: "By helping align the trillions in our pensions with society's values ... this campaign will support the whole economy transition required to achieve net zero."

Of course, throw in quote from Mark Carney, the United Nations Envoy on Climate Action and Finance and former Bank of England governor.

Carney is now a Vice Chair of Brookfield Asset Management and Head of Transition Investing:

In this role, he is focused on the development of products for investors that will combine positive social and environmental outcomes with strong risk-adjusted returns.

He recently stated he won’t run for Liberals if there’s a fall election:

“I thought long and hard on this because I believe strongly in public service and in the government’s agenda, which I fully support,” Carney said in an interview Tuesday.

“In the end, despite the temptation to running and the wrestling with it, a commitment’s a commitment.”

Carney is the UN special envoy on climate action and finance and also chairs the Glasgow Financial Alliance for Net Zero, which aims to bring together banks and asset management firms worldwide to accelerate the transition to an economy based on net-zero carbon emissions.

His work will be crucial to the success of the UN climate conference, known as COP26, which is scheduled to run from Oct. 31 to Nov. 12 in Glasgow.

“It’s a critical time in the COP26 process. I made commitments to the (UN) secretary-general and the U.K. prime minister to organize the private sector for net-zero, for a net-zero economy and we have tremendous momentum and I don’t want to break that momentum,” Carney said.

“I think this is the best contribution I can make right now for Canada, arguably the world, but also for Canada because this matters. This matters hugely to us and this is something I can do, I’m in the middle of and I need to see it through.”

Carney did not rule out running for the Liberals at another time.

Anyway, UK pensions are being urged by the non-profit campaign Make My Money Matter to commit to net-zero before U.N. climate change conference.

Back in February, Tony Burdon, chief executive at Make My Money Matter and Nick Robins, professor in practice – sustainable finance at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, wrote a joint blog comment on how "good" net-zero pensions are turning commitment into actions:

With the Glasgow COP26 on the horizon, all eyes are on the UK to lead a green recovery out of the coronavirus crisis. This requires the world’s financial system to join the race to net-zero emissions.

Here in the UK, pension industry leaders have already started to show how the stewarding of our long-term savings can be combined with reallocating capital in order to drive us toward a net-zero future. And we have now reached a crucial tipping point in this transition. Commitments from giants such as Nest and BT – followed by this week’s announcement from  Scottish Widows – mean millions more pensions are committed to net zero.

The beginning of 2021 also saw the launch of the world’s first pension that is net-zero now – not later – from workplace fintech Cushon. With the Biden administration joining the club of net-zero nations, the $226bn (£164bn) New York State Common Retirement Fund committing to net zero by 2040, and major businesses such as Vodafone and Tesco bringing forward their net-zero goals, the writing is on the wall: early action is the way to get ahead of the inevitable shift that will affect every corner of economy.

From when we launched Make My Money Matter, there are now nearly 20 million UK pensions – representing over £340 billion of assets under management – committed to net zero. With more announcements on the horizon, there is an opportunity for all pension providers to do so ahead of COP26 in November – making the UK the global lead on green pensions.

Throughout this journey, we need to avoid greenwashing and ensure all commitments are credible and accountable to members. To tackle both the risks to member savings, and the urgency of the climate crisis, it is critical that all net-zero commitments follow three key principles – speed, standards and society.

First, speed. According to a report from the UK’s Climate Change Committee, net-zero investment needs to be frontloaded and grow fivefold this decade. Serious pledges mean delivering a halving of emissions before 2030, on the path to the 1.5-degree ambition in the Paris Climate Agreement well before 2050. In order to drive that pace, trustees must ensure corporate assets across portfolios have a credible climate transition plan, with annual assessment of company performance, by instructing fund managers to adopt a ‘Say on Climate’ approach.

Second, transparency and standards. Trustees should create five-year targets, communicate plans to members and report annually on progress against their benchmarks. Commitments must also conform to international best practice for consistency and comparability. The Net Zero Asset Owners Alliance protocols, or the Institutional Investors Group on Climate Change, provide clear guidance on pace, stewardship and the inclusion of scope three emissions.

Third, society. Net zero will only be achieved through a just transition, that is equitable and supports jobs and livelihoods, as well as the transition developing countries will need to make. Making sure that net zero is accompanied by a strong focus on the social dimension is crucial to ensure that no-one is left behind. Funds can make this happen through stewardship, asset allocation and working with policymakers as they devise their strategies.

The race to net zero opens all of our eyes to the power of our pensions in creating a healthy world for our retirement, and one in which our children can thrive. But it is just the start, not the end of the process of making our money matter.

As we crawl out of a global pandemic, the task may appear daunting for trustees who must prioritise member benefits above all else. However, if invested in a sustainable manner, UK pension schemes can benefit members through both building the world they retire into, while protecting their returns from climate risks.

Ahead of COP26 this year, we want to see all major providers take the lead of Scottish Widows and other first movers, to close the two trillion green pensions gap that still remains.

Tony Burdon and Nick Robins (both featured at the top of this post) are making a persuasive case for pensions to move quicker on committing to net-zero and I particularly agree with this passage:

The race to net zero opens all of our eyes to the power of our pensions in creating a healthy world for our retirement, and one in which our children can thrive. But it is just the start, not the end of the process of making our money matter.

Global pensions and other large institutional asset managers (sovereign wealth funds, BlackRock, Fidelity, Blackstone, etc.) have enormous power to influence change to make this a better world.

They're also right that speed, transparency and more inclusive growth (a just society) must be taken into account as we move toward net-zero.

In regards to the seven criteria they sent to UK pensions:

  • Matching the 1.5 degrees Celsius ambition of the Paris Agreement and reaching full net-zero no later than 2050.
  • Rapidly exiting from all coal investments.
  • Active engagement and proxy voting with companies.
  • Divesting where necessary.
  • Investing in climate solutions.

I highlighted the ones that I don't agree with because I'm not a fan of divestment in oil and gas (see my last comment on AIMCo).

In fact, CPP Investments' CEO, John Graham, addressed why blanket divestment is not the way forward when he went over maintaining the sustainability of that plan for generations

In short, divestment might appease environmental zealots but in practice, it doesn't do much except transfer risk to another fund that has little to no ESG standards, typically funds that don't take active engagement seriously.

Also, truth be told, pensions have a fiduciary duty to their members, their first focus is on matching long-term liabilities and maximizing risk-adjusted returns. And that means they can't divest out of oil & gas.

Canada's large pensions are committing to net-zero but they're doing it very carefully and methodically, and that includes investing in new technologies and in areas where it makes sense to invest as the world transitions away from carbon (renewable energy, green infrastructure, properties which are LEED certified, etc.).

They are united when it comes to more ESG disclosure and they're taking the lead on responsible investing (although some European pensions were ahead of them).

All of Canada's large pensions are committed to lowering their carbon emissions and achieving net-zero as soon as possible but again, they're doing so in a variety of ways that does not include blanket divestment.

But even in Canada, we need to be cognizant of sweeping changes taking place.

Catherine Marshall wrote a comment for Benefits Canada on understanding the changing legal climates for institutional investors: 

In case you missed it, a recent legal opinion by pension lawyer Randy Bauslaugh suggested plan sponsors might be personally liable for failing to consider risks posed by climate change in the institutional investment decision-making process.

Bauslaugh’s paper connected the dots between the current evidence on the materiality and urgency of the financial implications of climate change and the recent reflection of this evidence in Canada’s courtrooms. He concluded that there’s the potential for plan sponsors and their agents to be held personally liable for “economic, reputational or organizational loss” if they fail to consider the potential financial impact of climate change when making investment decisions.

“In view of widely accepted evidence of climate change and its financial implications, including evidence recently accepted by the Supreme Court of Canada, pension fund fiduciaries ignore, at their peril, the financial risks climate change poses to the investments they have a duty to manage.”

Ignoring financial risks can have consequences. When Bauslaugh wrote “ignore at their peril,” it’s code for “this could cost you.”

Canadian pension plans have only incorporated climate changes risks into investment decisions voluntarily, if at all. Although legislation compelling plan fiduciaries to consider climate change has yet to be put in place, the potential consequences of not doing so may motivate them. In an email, Bauslaugh explained there’s a growing recognition of the level of financial risk from this urgent problem.

“Nothing has changed in terms of fiduciary duty — what has changed is the recognition that climate change poses material financial risks and opportunities that fiduciaries responsible for investment management decisions just shouldn’t ignore.”

The paper laid out a list of possible consequences, including fines levied under pension standards legislation and personal financial responsibility for investment underperformance or loss resulting from failure to properly manage climate change risks including compensation or damages.

So who, exactly, might be in imperiled according to Bauslaugh’s opinion? The types of external providers listed in the paper include actuaries, accountants, pension plan consultants, investment managers, mutual fund companies, trust companies, life insurance companies, third-party administrators and lawyers.

What’s the big takeaway? Most of the investment business is on the list.

This includes the almost 17,000 Canadian registered pension plan administrators — trustees and the plan staff members of defined contribution and hybrid plans. In his paper, Bauslaugh noted that the vast majority of RPPs are too small to have in-house climate change expertise. This requires small plans to rely on third-party service providers which effectively results in plan administrators sharing the fiduciary duty with their expert agents.

There’s another category of investments that might be impacted by Bauslaugh’s legal opinion. He indicated that companies offering group registered retirement savings plans to their employees could potentially be subject to the same fiduciary standard as RPPs.

Who’s relied on, and for what, would ultimately determine the level of fiduciary responsibility. This would vary from plan to plan.

Insurers are also moving along with the times. Directors and officers insurance has traditionally excluded coverage against property damage. However, a recent blog on climate change litigation by a large insurance underwriter said that, in addition to property damage, exclusions on bodily injury, mental anguish and death could come into play.

It’s a truism that when it comes to climate change, there’s no place to hide. Pension plans, take note.

Indeed, pension plans are taking note, some more than others.

Another area of interest? How are global pensions going to invest more in emerging markets and reconcile that with their ESG priorities?

I had a great discussion with Katherine Tweedie, Country Head, Canada at Ninety One, on this topic and hope they can come back to me in the future with a blog comment to provide more insights on net zero and implications for emerging market assets.

Ninety One is a signatory to the Net Zero Asset Managers Initiative, working with investor networks, companies and their clients to support the goal of net zero emissions by 2050 or sooner.

Anyway, let me wrap it up there, I covered enough for today.

Below, on the 1st of June, Make My Money Matter hosted the world's first Net Zero Pension Summit. 

Co-hosted by Richard Curtis and Mark Carney – and featuring senior leaders from the financial world – the summit discussed how the $50 trillion invested by pension funds globally can help tackle the climate emergency. 

The event featured world-leading guests, including Deputy Secretary General of the UN Amina Mohammed, Chair of the Elders and former President of Ireland Mary Robinson, as well as the CEOs of Nest, PRI, Brunel Pension Partnership, WWF, Scottish Widows, Aviva Investors, BT Pension Scheme, Pension Danmark and Cbus.