As 2021 draws to a close, I feel happy to have completed a second year of monthly newsletters. The deadline motivates me to write regular blog posts, which in turn have sparked interesting conversations on LinkedIn. In May this year, I started to write articles which aim to demystify sustainable investing as well as explain what this means for pension scheme members. This month I continued the series with a piece asking whether members are well served by their scheme investing in fossil fuels as well as one examining how closed defined benefit schemes can help to protect the planet and improve society. December also saw the publication of my recent Professional Pensions article which took a look at how trustees responded to the introduction of climate-related financial disclosures.
The fossil fuel challenge
This post discusses whether there is a potential storm brewing between scheme members and pension providers over investing in oil and gas. The majority of employees do not want financial firms to support or profit from fossil fuel extraction. But for the millions of UK citizens who have an auto-enrolled pension, it’s likely their portfolio is invested in companies like BP. While these investments have enabled asset owners and managers to persuade companies to adopt net zero targets, there is an assumption these firms will be able to become low-carbon. The article questions whether that’s a fair assessment and if investing in these firms isn’t adding transition risk to scheme members’ portfolio.
Making all private sector pension schemes sustainable
While the majority of the working population pays into an auto-enrolled defined contribution pot, the bulk of the UK’s current private sector pension wealth is concentrated in closed defined benefit schemes. If we want to embed sustainable investment principles in all UK pensions, this piece examines how we can do that with these legacy schemes. But we need different ideas to the ones we use for auto-enrolled pensions. A closed defined benefit pension scheme is more heavily invested in fixed income than an auto-enrolled pension. Around half is allocated to government bonds with around 20% assigned to corporate bonds and 30% in equities or alternatives. While it’s straightforward to include sustainable investment principles in corporate bond portfolios, it’s much more challenging for government debt.
Climate disclosures: As much about thinking as acting
My latest article for Professional Pensions looks how TCFD will shape trustee thinking on global warming risk. It examines how building climate change scenarios are proving challenging for trustees. This can be made easier by focusing on the current portfolio and thinking about how that needs to change to reflect the 2050 net zero goals. Getting hold of all the necessary carbon data is also proving difficult but it is hoped this will ease over time. Consultants are hopeful this regulation will create a more holistic approach to the risks surrounding climate change for pension schemes.
Plans for 2022
Omnicron permitting, I will be hosting my second networking event on 18th January. Please get in touch if you or any of your colleagues would like to attend. At the start of the year, I will be sharing my thoughts on the key must-dos for any asset managers wanting to build a sustainable investment business. I plan to host regular events through the year which will continue to explore key sustainable investing trends as well as continuing with the blog posts on the same theme.