“Fidelity engages with these companies on behalf of our clients to ensure ESG is embedded into their strategies when choosing which companies to invest in.”
Ryan Medlock, Royal London’s senior investment development manager, says providers and asset managers should all now have a net zero transition plan.
“Royal London, like many other providers, has signed up to Paris-aligned targets. This impacts the investment strategy of pension funds.
“Climate outcomes are now built into our modelling, alongside risk and return, when considering the asset allocation and underlying investments held within our default investment strategy.”
He says that investing is also linked to government policy: “If policy were, for example, to disincentivise pollution through taxes or pricing carbon, investment in these companies would become less attractive.”
As such, government policies in this area have a significant effect on what providers choose to invest in.
“Asset managers have to balance the risks of government policy impacting their portfolios as well as ensuring they are aligned to members’ preferences.”
The value of behavioural changes
For Brian Henderson, partner and head of sustainable investment at Mercer, the regulation around climate change and pension fund investing has “played its part”.
He says: “The UK Climate Change-Related Disclosures has focused the minds of more than £5bn of funds, with more than £1bn following now.
“In looking at how schemes consider climate and their associated risks both in terms of investment, funding and for defined contribution pot size, we now see evidence of action towards assets that will help reduce carbon dioxide in the pension scheme.”
Henderson adds that as this is a risk, it is something that needs to be managed, like all risks.
“Until very recently, it has been and continues to be, difficult to quantify these risks, but we are slowly seeing better metrics becoming available.”
He mentions, however, that reducing carbon dioxide from the pension scheme may just shift the problem elsewhere instead of keeping carbon dioxide figures down altogether.
“Of course, reducing carbon dioxide from the pension scheme may just move the problem to someone else if selling in public markets, so other more direct approaches are starting to evolve through private markets, as well as using stewardship to force change in corporate behaviours.”
According to Nazarova-Doyle, transitioning to achieve net zero in the near term, with the aim of averting the worst effects of climate change, has the potential to impact investment value both positively and negatively.
