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COP26 president Alok Sharma, UN representatives and pension CEOs have called on funds to play their part in the fight against global warming, while there will be a consultation on TCFD guidance. Will it be enough to make the pensions sector change at pace?
Pension funds have a central role in reaching net zero because of their long-term liabilities and investments, making them “among the most vulnerable to climate change”, said Mark Carney, UN special envoy on climate action and finance, at a Net Zero Pension Summit organised by campaign group Make My Money Matter on Tuesday.
“As a sector, you’re hugely influential in aligning other parts of the system to align towards net zero," the former Bank of England governor noted.
To improve the information pension funds need in order to manage climate change risk and take opportunities, “we’re working on a mandatory framework based on TCFD recommendations”, he explained, adding that there will be a consultation on guidance for complying.
Sharma: Commit to net zero
Regulations to make TCFD alignment mandatory for large pension funds, master trusts and collective defined contribution schemes are being worked on to implement provisions in the Pension Schemes Act 2021.
Alok Sharma, a cabinet member and president for COP26, said for pension funds there will be “a real advantage to getting your house in order, and early”. He warned that consumers increasingly want companies to be aligned with their values – meaning those that are not might find themselves at a competitive disadvantage.
“I am urging all financial institutions to... commit to a net zero future,” Sharma said. He also called on institutions to commit to: exiting coal finance; increasing investment in climate action and developing emerging markets; ensuring no investments contribute to deforestation and add to regeneration; and reporting in line with the TCFD.
“Today we find ourselves at a crunchtime. To keep 1.5 degrees in reach, we must halve emissions by 2030,” he told investors.
No more time to waste
The sector can’t waste any time on the climate issue, agreed Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change.
At the time of the 2015 Paris Agreement it was thought 2050 would be sufficient as a climate target. “Today, thanks to science, we know we don’t have 30 years, we have nine years. By 2030 we have to have cut emissions in half – if we don’t, we close that portal,” she said.
Similarly, there is less leeway on the level of any tolerable temperature rise. "We now know we cannot let temperatures rise beyond 1.5 degrees; 1.5 degrees is the new 2 degrees,” said Figueres.
She said what has not changed, however “is the very simple but powerful fact that wherever finance goes, so go emissions, or so go emission reductions”. The global pensions sector with its $50tn in assets could “single-handedly shift the future”, she argued, adding: “This is the fiduciary duty to your beneficiaries.”
BT breaks target down into chunks
A number of pension funds have made net zero commitments, including Nest, Smart Pension, the BT Pension Scheme, Brunel Pension Partnership and the South Yorkshire Pensions Authority, as well as providers like Aviva and Scottish Widows.
BTPS chief executive Morten Nilsson said the £57bn fund made its 2035 net zero commitment last year after sponsor BT had already set its own target two years earlier. He said the fund carried out a Mercer study three times, giving it “a good sense on how climate change can impact our returns”.
The fund also had “a pretty good idea about where emissions come from in the portfolio”, said Nilsson, with 80% of emissions in the corporate bonds and equity portfolios down to 20% of assets.
Nonetheless, the data is not perfect which Nilsson admitted was an “uncomfortable place” to be in as a corporate pension fund. To overcome this dilemma, the fund decided to create five-yearly interim targets, gathering more data for each review. Nilsson advised other funds to “get started sooner rather than later”, and pointed out the many available resources provided by the Institutional Investors Group on Climate Change, the Net-Zero Asset Owner Alliance and others.
What can pension funds do to reach net zero? Is investing for a liveable future part of trustees' fiduciary duty?