Aaron Punwani, chief executive of Lane Clark & Peacock (LCP), believes that most people in the pensions industry accept that a climate emergency is looming, and that mitigating the risk of catastrophic events requires a massive redeployment of capital. UK pension fund trustees and their advisers have been inundated with regulatory requirements to consider climate change, to have regard to the impact of climate risk in making decisions, and to report that they have done so.
However, the reality is that, for the large majority of UK pension assets – the £1trn plus held by closed defined benefit (DB) schemes – the dots are not being joined. Closed DB schemes are often on a journey to insurance buyout and are increasing their allocation to low-risk assets in the meantime.
Given trustees’ responsibility to their own scheme, their primary fiduciary duty to make their own members’ benefits secure, and the fact that their holding in growth assets is both small and temporary, many trustees understandably feel that the direct impact they can realistically have on changing the outlook for climate change is limited. The capacity on trustee agendas to focus on responsible investment is instead being crowded out by TCFD reports and other compliance requirements.
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As a result, the current trend of increasingly onerous compliance reporting requirements is not going to be of much help to the planet and society unless it is also accompanied with a re-interpretation of trustee duty to support meaningful real-world action. Punwani notes that very little of the capital needed to drive the energy transition is coming from UK closed DB schemes.
Punwani suggests that if pension scheme assets are going to be part of the climate change and energy transition solution, this will require more than the current actions: a radical re-interpretation of trustees’ fiduciary duty, in two dimensions: time horizon and macro versus micro. This re-interpretation would allow trustees to consider members’ best financial interests over the remainder of their lifetime and the real-world impact of their investment decisions.
With these changes, the logic flow to support legitimate changes in behaviour will be as follows: a shift from being driven by regulatory reporting to a focus on real world impacts.
In practice, this means that trustees will need to work together with other institutional investors and asset managers to drive change.
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When it comes to judging trustees’ performance, Punwani’s goal is simply to encourage a constructive debate on these issues. This is not a lecture to anyone on how they should invest their pension scheme assets. But let’s be open about the fact that the current trend of increasingly onerous compliance reporting requirements is not going to be of much help to the planet and society unless it is also accompanied with a re-interpretation of trustee duty to support meaningful real-world action, which may involve sustainability efforts.
According to the UN Environment Programme, a global transformation to a low carbon economy is expected to require investment of $4-6trn (£3.2-£4.7trn) per annum. This is a massive change to capital flows which will impact on financial markets for everyone, regardless of the priority they personally place on addressing climate change.
In the end, it’s up to the trustee board to decide how much weight it wishes to place on this consideration relative to others. But one thing is clear: the current state of play is not sufficient to address the looming climate emergency, and a radical re-interpretation of fiduciary duty is needed to drive meaningful change.
