There is an emerging division in pension scheme attitudes to climate risk. Some fear that schemes are relying too heavily on asset managers to reach these targets. What is causing this divide and what pressures are asset managers now facing?

According to a survey by the Association of Consulting Actuaries, a third of pension schemes had set or are in the process of setting targets to reduce their exposure to climate risk. But almost three in 10 respondents of the survey said they do not intend to set themselves targets.

The data was collected in July ahead of this month’s COP26, but with four in 10 schemes yet to consider climate risk targets, will COP26 prompt schemes to act on climate targets within the next few years?

Despite rising demand for sustainable investing, investors are not confident that their current portfolios are aligned with their environmental, social and governance values, a recent report by financial technology firm Capital Preferences found. For the majority of investors across all regions, there was a mismatch between their ESG preferences and their actual portfolio allocation.

Only a quarter of UK investors were confident that their current portfolio is fully aligned with their values. The study also showed that many investors lack the confidence to put their ESG investment preferences into practice due to confusion over ESG terms and concepts, conflicting ratings, and a lack of guidance on how to identify the right investments in this sector.

“Many investors intend to invest sustainably, but lack the specific knowledge of how to do so,” said co-founder and group CEO of Capital Preferences, Bernard Del Rey. “The key for financial advisers is to equip themselves with enough knowledge and the right diagnostic tools to enable clear, confidence-building conversations that guide investors in accurately identifying their unique ESG preferences.” 

The ACA’s survey revealed that 61% of schemes have considered setting a target to reduce their exposure to climate risks, but only 33% have set or are in the process of setting a target. 

“The prominent driver of the emerging division in scheme attitudes to climate risk is scheme size. Larger schemes are being forced to engage, but for smaller schemes it’s still optional,” said Patrick Bloomfield, partner at Hymans Robertson. “Once trustees begin engaging [with] the topic, climate risks and the potential impact of climate transition on assets becomes abundantly obvious.”

Bloomfield also pointed out that not planning to set climate targets is often down to being poorly informed: “Those who don’t plan to set climate targets tend to… [regard] it as question of moral crusading or a job for their asset managers to worry about. This needs to change, but the industry will run into issues of smaller schemes having limited governance budgets, and needing to leverage off the work being done currently by the larger schemes.”

 

Partner at Isio, Stewart Hastie, agreed, saying that the division is largely driven by scheme size and the current regulation but could also be down to hesitancy: “I’ve seen some nervousness from schemes – of all sizes – about over-committing on some targets and not sure yet how they will achieve them. For example, I expect to see more net zero targets over time and for the time horizons to get revised inwards as confidence grows.”

Nine in 10 asset managers include ESG in discussions on underlying investments, and 60% of managers globally identify climate change and environmental issues as their clients’ top ESG concern, according to a recent survey of asset managers by Russell Investments

“In last year’s study, we noted that ESG is no longer an optional ‘add on’ but rather an essential part of decision-making… With climate change in particular becoming such a critical issue, managers will have to demonstrate a clear focus and active efforts to make improvements in this area or risk being left behind,” said head of responsible investing at Russell Investments, Jihan Diolosa.

Similar to previous years, managers continued to rank “governance” as the most important ESG factor that impacts their investment decisions, reflecting the importance of company management in delivering long-term enterprise value regardless of industries. Meanwhile “environmental” has increased over the past four years from 5% in 2018 to 14% in this year’s survey.

From the ACA survey, almost 80% of respondents say they look to asset managers to engage with the companies their scheme invests in. Few schemes retain in-house resource for stewardship and engagement. Hastie says that now most of the leading investment consultants have incorporated explicit ESG metrics into their manager selection criteria, there are “definitely rising pressures” for asset managers as ESG is “increasingly driving manager selection and retention”.

“ESG integration within asset management, investment and business practices has continued to evolve at a fast pace, with forward-looking materiality assessments being the key consideration,” said director of investment research at Russell, Yoshie Phillips. “However, there is still much progress to be made, particularly with respect to climate change, which is increasingly defining ESG agendas and ranks as the number one concern among underlying clients.”