How can investors achieve Paris alignment? Those at the forefront of change have shared their experience and revealed where the challenges lie. 

 

As the debate about climate risk intensifies – and its effect is painfully obvious in parts of North America – the UK government is rolling out climate risk reporting to investors and companies, but some investors are going further and looking to bring their portfolio in line with the Paris Agreement, which aims to limit global warming to 1.5 degrees, or commit to net zero emissions. 

 

 

Brunel Pensions Partnership, one of the eight local government asset pools, is a thought leader in this space. Speaking at the Pensions and Lifetime Savings Association’s ESG conference on Thursday, Brunel’s chief responsible investment officer Faith Ward emphasised that Paris alignment requires real economy changes, as well as climate solutions and stewardship. 

 

Ward identified five areas for action for pension funds, from policy – engaging with politicians and consultations – to carbon footprinting and persuading others to join the effort. 

 

However, she also did not hide the fact there are still some challenges – such as verifying the data and information provided by investee firms and investors having to question their statements. 

 

“A company might go, ‘I’m carbon neutral’ and think that’s the end of that particular story. That requires much more digging into. Is carbon actually the most relevant emission?... Methane might be more important,” she noted.  

 

Similarly, she warned that companies compensating for emissions is not the same as reducing them. Offsets need to be used “with extreme caution because what we need to see is a genuine reduction”, she said. 

 

 

Sometimes, investors require more granular information but she said this can be tricky to find for each asset class, and although the Net Zero Investment Framework by the Institutional Investors Group on Climate Change provides methodologies for the most common asset classes, it is still working on alternatives and derivatives. 

 

“One of biggest challenges is to really to understand whether these companies are really decarbonising. It requires me to have an expertise I can’t possibly have across the different sectors,” Ward noted. "The challenge is how not to get hoodwinked, having a strong framework; it’s incredibly difficult to see through what’s really going on there.” 

 

Investor alliances and collaborations, from the IIGCC to the Net-Zero Asset Owner Alliance and Climate Action 100+ can help with some of these challenges, according to others. 

 

Chief executive of Norway-based Storebrand Asset Management, Jan Erik Saugestad, said Storebrand’s experience as part of the Net-Zero Asset Owner Alliance has been that “we can’t be expert on everything but find that these networks are really useful”, for sharing competence and perspectives of different pathways. 

 

The pooling of influence and votes also helps to deal with the majority of companies, “that big section in the middle” between the best and worst ones, because “money talks... but you need a framework and alliances to help you”.  

 

He admitted that standardisation and data are challenges but said they are progressing rapidly with the TCFD, the EU’s Sustainable Finance Disclosures Regulation framework, and with the IIGCC working on a framework for the UK, as well as there being a new one for the US. “The challenge is connecting these,” he said. 

 

 

As well as collaborating with other investors, Saugestad also advised pension funds to make tangible commitments and to bring them forward as intermediate targets. He said a 2050 goal is fine, but “the key is to set short-term targets”. Storebrand has a goal of reducing scope 1 and 2 greenhouse gas emissions by 32% across its total portfolio by 2025 among others. 

 

The current lack of scope 3 data “is something you have to try to address in a systematic fashion” he said, noting that data is “constantly evolving”. 

However, Brian Henderson, partner and director of consulting at Mercer, warned that while some investors are way ahead, the majority of pension funds have not yet begun to seriously address climate risk management. 

 

“In the UK there are leaders that are doing fantastic things; then there’s the 95% playing catch-up,” he said. Henderson advised schemes to understand where they are now by calculating the baseline, which he said was not too difficult. Funds could then analyse the possibilities for a portfolio-wide transition before setting measurable targets and implementing a plan. 

 

 

   

But on the way to net zero, he sees scope for friction between sponsors and pension funds. “I’ve got clients where the corporate has set out their stall and has quite aggressive net zero dates, 2030,” he said, adding that there could be “some challenges there between sponsors and trustees” and that “the ambition needs to be somewhat balanced between the needs of the pension scheme and that of the corporate”.