The Rise of Green Pension Funds

By October this year, 81% of occupational pension scheme assets will have been assessed for climate risk, delivering a new level of accountability for pension savers, who will be able to understand more than ever how climate risks are being considered and mitigated.

This marks another milestone in the pressure to be ‘green’ when investing. Scheme members are already expecting to see a responsible investment approach from their managers, adding to the pressure for trustees to produce a coherent and measured sustainability strategy. These disclosures will further fuel a movement towards responsible pension investing.

In July 2021, pensions minister Guy Opperman described climate change in no uncertain terms, as a “major systemic financial risk and threat to the long-term sustainability of UK private pensions.” While the challenge is very real and very clear, finding the right green pension solution is unfortunately not always as straightforward.

Everyone wants their investments to help in the transition to net zero, but there’s significant debate around how best to make a difference and whether taking ESG into account will affect financial performance.

Empowering investors

At Coutts, we believe that only by understanding which actions taken by investment managers truly make a difference to the sustainability and profitability of companies can we have the fullest impact on the transition to net-zero.

Increased knowledge and communication about effective ESG investing is the key to meaningful change. The default response for many people is to simply shift their allocations to so-called ‘green’ investments, or those that already derive most of their revenue from sustainable activities. Yet the reality is that simply shifting investments from fossil fuel businesses to solar farms won’t be enough to make a difference for the planet.

Such a switch ignores those companies that need support to transition to a net-zero economy, and already have credible plans to do so – even if they are not there yet. We are keenly aware that sustainability is a journey which cannot be undertaken alone. It’s vital we engage with companies at every stage of their path to net-zero and help them change for the better. Research shows that collaboration and engagement adds value, as well as being a truly sustainable approach. At Coutts, we want to lead by example and to encourage others to do the same.

The role of investment managers

Finding out which companies are in the process of effecting a credible transition to net-zero requires serious commitment. It relies on a deep understanding of a company’s operations and strategy which requires relationship and expertise on behalf of investment managers, rather than a kneejerk divestment response. Managers who truly engage, question and are willing to challenge the practices that companies are engaged in can effectively manage the risks to pension funds, as well as make an impact on the planet.

By engaging on these issues, rather than simply divesting, managers can build value and improve outcomes.

A focus on engagement

At Coutts, when choosing where to invest, we focus on stewardship, through both voting and engagement, as well as ESG integration. We know that how a company reacts to its investors, as well as how it integrates its ESG goals, can be financially material – as these aspects of governance are indicative of good management and understanding of risk.

We’re also aware there could be positive financial outcomes when investors engage with investee companies over their low ESG ratings. For example, a 2021 study found that engagement with companies with low ESG ratings could be correlated with financial outperformance compared to their peer group.

The future of green pension funds

As the transition to net-zero continues, all of us will have a responsibility to engage with the businesses we invest in over their investment approaches, climate risk and their plans to reduce it.

Government edicts about reporting on climate change are important but can only do so much. It is also up to us, as investors, to engage positively with the companies we own, to make the biggest difference possible and mitigate the climate-related risks for our members.

At Coutts, by keeping up our rigorous approach to the companies we invest in and continuing to challenge them on their path to net zero, we know we are taking a truly sustainable investment approach, best for our clients, and the planet.

For more information, go to https://www.coutts.com/

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