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The ‘Goldilocks approach’ to pension investment and achieving net zero carbon emissions

Climate|Investments|Pensions Risk Solutions|Retirement
Climate Risk and Resilience

By Alasdair Macdonald | May 21, 2021

The ‘Goldilocks approach’ can be a useful aspiration and point of reference for pensions - not so fast that there’s a risk of detriment to savers’ funds, but equally, not so slow that they miss out on the opportunities.

Pension fund trustees can be passionate about returns for investors at the same time as being passionate about climate and ensuring we have a planet post-2050.”

Guy Opperman MP | Parliamentary Under Secretary of State (Minister for Pensions and Financial Inclusion)

“Pension fund trustees can be passionate about returns for investors at the same time as being passionate about climate and ensuring we have a planet post-2050. They can get a good return and be part of the solutions.”

The quote above comes from an interview conducted with Guy Opperman MP as part of Willis Towers Watson’s recent three-day Climate Risk and Financial Stewardship Summit. I noted it down because I think it sums up nicely why pension funds, and the trillions of investors’ savings around the world they oversee, are such an important part of solving the net zero emissions puzzle.

But even if trustees believe passionately what the Minister said, it may not be immediately obvious – since they’re not generally climate experts after all – how to go about it.

That’s where I think the ‘Goldilocks approach’ can be a useful aspiration and point of reference for pensions. By that, I mean an approach that is not so fast that there’s a risk of detriment to savers’ funds, but equally, not so slow that they miss out on the opportunities that are inevitably going to come out of transitioning economies.

A carbon journey plan

The obvious area of reflection for pensions funds is the assets they’re investing in. Where will the risks and opportunities of the coming decades be and how do they mesh with the potential timing of investment actions? But they also shouldn’t overlook the impact on liabilities. There’s a relationship between temperature and longevity, but also between temperature and economic conditions, and then between economic conditions and longevity.

This illustrates that pensions aren’t immune to the physical risks from climate change – certainly not if they’re investing in assets exposed to increasingly volatile weather patterns. But for most schemes, given their time horizons, the greater risks come from transition risk (the legal, technology, market and reputation costs linked to how organizations adapt, and the speed at which they adapt, to lower carbon and climate resilient economies).

A key tool for managing transition risk, like any other pension scheme risk, is likely to be a journey plan – in this case, a carbon journey plan, for which five parameters will need to be set:

  1. The metrics used to measure exposure that are most useful to the management of individual schemes (no one size will fit all)
  2. The target (probably, by default, net zero emissions) and the timescale for reaching it
  3. The current baseline
  4. Potential actions – on a scale between engagement and divestment
  5. Triggers for action

Why stewardship matters?

A key point related to item 4 above is that businesses are going to need investors, including pension funds, to help them achieve climate solutions.

And that will need engagement and stewardship – by being active owners of companies on their journey to a carbon neutral economy and to help shape the type of world in which their members live and can enjoy retirement. Move too fast in the other direction, such as wholesale, short order divestment of high carbon assets, and there’s a risk the lights will go out to everyone’s detriment. It will also need advocacy to influence the broader agenda and financial system. Current estimates, for example, suggest that only 25% of current global carbon emissions are investable. In other words, the investment industry cannot directly solve the remaining 75% of the problem without widening its reach.

Meaningful action on carbon emissions and global warming is a marathon, not a sprint. Paced appropriately, perhaps with Goldilocks in mind, pensions can contribute substantially to the solutions we’re all looking for.

View a replay of the interview with Guy Opperman MP and an engaging debate with David Fairs, Executive Director of Regulatory Policy, Analysis and Advice - The Pension Regulator. Jane Platt CBE, Chair - LifeSight. Denise Le Gal, Independent Chair - Brunel Pension Partnership Board. Keith Scott, Director - Law Debenture here.

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