How schemes are holding companies to account on climate change

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Border to Coast Pensions Partnership recently exercised its voting rights during the 2023 AGM season to express concern at firms’ approach to managing climate change risks.

Pension schemes are increasingly holding companies within their portfolio to account on climate change. 

Douglas Anderson said pension schemes ‘play a key role’ in addressing the climate crisis and must ensure companies they invest in are held accountable. 

Anderson, who is head of consultant relations at asset manager Federated Hermes, said: “Large institutional investors like pension schemes play a key role in addressing the climate crisis and the journey to net zero. 

“Disinvestment should be a last resort – we can’t solve the climate crisis by avoiding or disinvesting from fossil fuels alone, it’s too late for that. 

“Ensuring companies that schemes invest in are held accountable to achieving their climate objectives is paramount – we need to move forward in unison if we are to solve the climate crisis. 

“Ultimately, this will benefit pension scheme members who will be investing in companies that have long term sustainable businesses.”

His comments come after Border to Coast Pensions Partnership recently strengthened its responsible investment voting guidelines and exercised its voting rights during the 2023 AGM season to express concern at firms’ approaches to managing climate change risks.

Jane Firth, head of responsible investment (RI) at Border to Coast Pensions Partnership, said: “Investors risk giving up value by failing to ask portfolio businesses how they are managing risk. As an active steward of our partner funds’ capital, we have a responsibility to clearly express our concerns about the lack of transition progress. “Given we consider climate change a critical risk to the long-term success of some portfolio companies, we are using perhaps the most influential means at our disposal – voting – to support credible proposals that are aligned with achieving net zero.”

“Investors need to be authentic in how they put commitments to net zero and company engagement into practice, resisting attempts to politicise ESG and climate risk management.”

Firth said that as one of the largest UK Local Government Pension Schemes (LGPS), Border to Coast is able to vote on behalf of its partner funds to ensure voting aligns with its RI policies.

She added: “Voting across all our funds in alignment with our RI policies and voting guidelines ensures a clarity of approach for our Partner Funds. However, many asset owners do not have this assurance and misalignment between asset owners and some asset managers is becoming evident.

“Not only are some investors exposing themselves to accusations of greenwashing by voting counter to their climate commitments, they are also hindering the potential of ESG stewardship to secure quality company transition plans, reduce climate risk, and add long term value.”

More to come

Industry experts now anticipate that more schemes will now follow this trend of taking into account their impact on climate change. 

Anderson said: “We are seeing a rapid increase in institutional investors, especially LGPS pools and insurance firms, taking an active stance on addressing climate change risks and exercising voting rights is one effective way to do this, improving lending terms is another way in bond investing. Moreover, on a proactive basis, many long-term investors are looking at investing in nature-based solutions as vital to solving the climate crisis – investing in natural capital can help restore and protect the world’s ecosystem from continued depletion by human activity.”

A similar notion was echoed by Lloyd Whitworth, who said this increase is because fiduciary duty requires all material risk and return factors to be considered in making an investment decision and this includes climate change.

Whitworth, who is head of investment and stewardship at Surrey Pension Fund, said: “Fiduciary duty requires all material risk and return factors to be considered in making an investment decision. Climate change is clearly a material risk factor. 

“The Surrey Pension Fund seeks to mitigate this risk by requiring its investment managers to consider it in their decision-making processes, consistent with our responsible investment and voting policies. This, first and foremost, represents good stewardship of the capital our members will rely on in their retirement to fund their pensions.”

Interestingly, Whitworth said Border to Coast has inspired more LGPS funds to follow suit. 

He said: “Border to Coast, the Surrey pool, has given Surrey more focused resources in the responsible investment space; its Climate Opportunities Fund allows us to take advantage of the investment opportunities offered by the change to a sustainable future, including renewable energy. 

“However, we remain responsible for our own investment strategy and have a long history of responsible investment. The Surrey Fund has invested in dedicated renewable energy funds for over a decade, has a clear responsible investment policy and has set a net zero target date of 2050 or sooner in 2023.”

Whitworth added that Surrey Pension Fund has also been able to strengthen its voting policies. He believes this is likely to become a more common trend as pooling offers the opportunity to influence through a collective voice.

He said: “Both through Border to Coast and locally, Surrey has been able to strengthen our voting policies. This is likely to become a more common trend as pooling offers the opportunity to influence through the voice of collective capital and voting is an important mechanism for effective stewardship of our members’ capital by holding our investee companies to account.”

Whitworth added that it is important for other pension schemes to realise that investing responsibly does not sacrifice profits. 

He said: “Responsible investment does not mean making investment decisions solely on the basis of environment, social and governance factors, but including them alongside more traditional risk and return metrics. The fund uses this combination of risk and return metrics to support long term investment performance.”

The data challenge

Commenting on the challenges pension schemes may face by holding companies within their portfolio to account on climate change, Yann Bloch, head of product & pre-sales for Americas at NeoXam, said:  

“One of the main challenges for investors holding these assets is making accurate evaluations of their holistic contributions towards the energy transition. 

“Regulators globally are pushing through changes to create more standardisation when it comes to rating companies’ green credentials, and fortunately the amount of information that investors can rely on now, compared to say five years ago, is dramatically greater. 

“However, this has created a new challenge – standardising and centralising all of this disparate data, which often comes in from many different sources, and disseminating it across the business to ensure that it is utilised efficiently and accurately. 

“It is no good taking more and more ESG data in, if you do not have the data architecture to actually make effective use of it. Many investors still rely on spreadsheets and legacy systems which simply aren’t fit for purpose when the investing landscape has changed so much.”  

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