Insights & Reflections from London Climate Action Week 2019

July 2019

London Climate Action Week (LCAW) from 1-8 July 2019 gave the platform for a plethora of events staged by a spectrum of different actors and stakeholders. This provided an opportunity to reflect on the UK and the global landscape: on where we are right now in terms of tackling the climate emergency; and, just as importantly, what more needs to be done.

The existence of the first ever LCAW was in itself a statement. It probably represented, at least in part, a view that it is essential to speed up the British and international response to climate change, against the backdrop of the growing anxiety about what the science and multiple extreme weather events around the world are telling us. Society – epitomized by the school strikes and Extinction Rebellion’s radicalism – is responding in ever-increasing waves. The extraordinary explosion in the growth of renewable energy over the last decade has provided hope for a cleaner, low-carbon future. The adoption of a “climate emergency” and the 2050 net-zero goal by the UK Parliament is also a substantial policy response in this country. This accelerates the UK’s current target of cutting emissions by 80% in 2050 compared to 1990 levels, a goal enshrined in the 2008 Climate Change Act. The UK’s new target is “net-zero” by 2050. But a feeling at the start of LCAW that policymakers, investors and companies are still not acting with the due urgency and ambition has not gone away, despite the collective commitment, energy and creativity that LCAW inspired.

Taking stock, it seems to us that the waves of societal actions are now making fundamental demands of governments and the private sector (or, in shorthand, the “market”).One of the landmark events for the UK Government during LCAW was the launch of the Green Finance Strategy. This strategy has been more than 12 months in the making, following the report from the Green Finance Taskforce in April 2018. Looking at the strategy’s contents, there are some welcome measures, viz the establishment of the Green Finance Institute and mobilising green finance for home energy efficiency. But the threat to regulate on the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) by 2022 feels too much like a compromise between those who want action now and those who still feel uneasy about regulating in this area. More generally, while the introduction does convey the necessary sense of urgency, the overall package of measures feels underwhelming and a bit “last year”.

This leads on to a wider point we picked up at various LCAW gatherings: the need for government across the board to be consistent in its policymaking if it really is serious about acting on the climate emergency. This requires those responsible in differing government departments – especially climate and finance – and regulatory positions to be co-ordinated and not create gaps or vacuums which leave business and investment uncertain about the direction of travel. Whitehall seems, for example, relatively joined-up on green finance: can the same be said about its approach towards carbon pricing?

However, the market must not be given a free pass either. A key reflection from LCAW is that UK government has already put in place frameworks that should encourage investors to step up and seize the opportunities that the transition is offering. There is more than enough evidence available right now on the economic tipping points for renewables (positively) and for coal (negatively), but many investors are still proceeding overly cautiously.

All that said, we should note that it was a successful week for the divestment movement: witness announcements from organisations such as the Royal Society of Arts, the Royal College of Emergency Medicine and the National Trust that they will divest from all fossil fuels in their portfolios. In other notable news during LCAW which may be a sign of things to come, the London Stock Exchange announced – in a move designed to distinguish between carbon-intensive companies and greener producers – that they are reclassifying oil and gas companies into a non-renewable energy category

In conclusion, we believe there are some over-riding lessons that need to be applied:

  • for policymakers and regulators: they should not allow finance and investment to cite policy gaps or mixed messages as an excuse not to act now on climate and sustainability;
  • for the market: they cannot leave it all to governments. There is competitive advantage to getting out ahead on this agenda. Yes, the politics are difficult (Trump, Saudi Arabia, Brazil, Brexit, etc.). But the science is uncontestable, and leaving behind the niche domain of environmental periodicals for the BBC news headline and FT financial analysis. Furthermore, the evidence that low-carbon will be the growth story of the 21stcentury is accumulating; and
  • finally, investors who are not yet comprehensively addressing climate-related risks and opportunities in their portfolios, and are inadequately preparing for the transition, are going to be in for a surprise when they wake up one day and find that the world has become a very different place – it’s called the Future.

 

 

 

The Role of Pension Funds in Addressing the Low-Carbon Transition: Key Takeaways from Chatham House Meeting, 1 July 2019

On 1 July 2019, as part of the UK’s inaugural London Climate Action Week 2019, Sustineri, Pensions for Purpose and The Prince’s Accounting for Sustainability Project (A4S) co-hosted a roundtable at Chatham House. The purpose of the gathering was to highlight major challenges and discuss pragmatic solutions in the UK pension fund industry in order to help drive systemic change in addressing climate-related risks and opportunities in pension portfolios. We convened senior representatives from Local Government Pension Schemes (LGPS), occupational pension schemes and the policy/regulatory community – including a keynote speech from Parliamentary Under-Secretary of State for Pensions and Financial Inclusion, Guy Opperman, and scientific insights from Professor Jim Skea, Chair of Sustainable Energy at Imperial College and Co-Chair of the IPCC Working Group III.

 

In a rich and varied discussion, policymakers heard from pension funds about what would help them to deliver on the climate goals. Pension funds also heard from government about what they can do to enable us to reach our common goals.

The key takeaways from the discussions were:

  1. Climate change poses a systemic and material risk to portfolios

The science is clear and irrefutable. It is vital for trustees of pension funds to address climate risk as part of their fiduciary responsibility. Climate change should not be treated as something separate, but should be assessed with equal importance to other economic risks. Recent regulatory changes have underlined the expectation that climate risk is treated as a financial risk, but this is not universally acknowledged among pension funds.

  1. Pension funds are responding, but more urgency and awareness is needed

A growing number of pension funds are addressing climate risks for example through low-carbon funds, investment exclusion polices and TCFD-aligned disclosure and reporting. However, participants noted that many trustees are not ‘climate competent’ or aware, putting their portfolios at risk.

  1. Investing to achieve net zero emissions by 2050 while building in resilience to address physical risks

Reducing the carbon exposure of funds, and testing whether portfolios are consistent with limiting the increase in global average temperatures to 1.5 degrees, is important. At the same time, pension funds need to invest in resilience to protect their investments from the physical risks of climate change as far as possible. These two goals can be mutually reinforcing.

  1. UK’s 2050 net-zero target

Participants welcomed the UK Government’s 2050 net-zero target. But investors need a joined up response across government, with policies adopted in the near term to help deliver that target, such as a coherent renewables policy and stronger carbon pricing.

  1. The need for policymakers and regulators to be more joined up

LGPS and occupational pension schemes are currently governed by different government departments and regulatory regimes, and would benefit from a more consistent policy approach. In addition, there was a view that there needs to be coordinated action across each relevant regulator covering business and the wider financial community, for example around reporting requirements along the investment chain.

  1. Opportunities of the transition

Pension funds should focus on the opportunities arising from the transition to a low carbon economy, as well as the risks. This includes a recognition that private markets are becoming more important for investors (taking into account the challenges that private markets pose, such as a lack of transparency).

  1. Looking beyond carbon and energy

The low-carbon transition is not just about the carbon and energy sectors. There will be impacts on other sectors such as the heavy industry and automotive sectors, land use and agriculture (note the IPCC will be publishing a special report on land use and food security in the autumn). More guidance is needed to help pension funds understand and respond to risks and opportunities in these sectors.

  1. The collective strength of pension funds

Pension funds have real power to influence other actors in the investment chain on the low carbon agenda, including asset managers and investment consultants. This influence is significantly enhanced when collective action is taken and pension funds share insights with one another. Market signals from investors matter, including on engagement such as shareholder voting at AGMs.  In addition, pension funds should demand more granular reporting and transparency on climate-related risk factors from their investment/asset manager at fund-specific level.

  1. Challenges when investing in pooled funds

Specific challenges exist for pensions investing primarily in pooled funds, with trustees finding that they are unable to influence the engagement and voting policies of funds in which they might be invested.

  1. Importance of civil society action

Civil society is mobilising on climate change, as evidenced by the school strikes and the rise of Extinction Rebellion. Beneficiaries (although many need to get further engaged) are also attaching greater importance to where pension funds are investing their money. Investors and companies who lag behind are increasingly vulnerable to being called out for inaction.

Please refer to the Minister’s speech here.

For any queries, please contact Richard.folland@sustineri.earth /  shuen.chan@sustineri.earth

 

Sustineri at London Climate Action Week 2019

July 2019

As part of the London Climate Action Week, on 1 July, Sustineri, Pensions for Purpose and The Prince’s Accounting for Sustainability Project (A4S  co-hosted a roundtable discussion at Chatham House on The Role of UK  Pension Funds in the Low-Carbon Transition. Representatives from local government and occupational pension schemes, and the policymaking and regulatory community, took the opportunity to discuss how they can individually and collectively respond to the climate emergency, addressing the challenges, risks and opportunities that it presents.
Key guest speakers were Guy Opperman, Under-Secretary of State for Pensions and Financial Inclusion at the Department for Work and Pensions (DWP), and Professor Jim Skea CBE FEI FRSA HonFSE, Chair of Sustainable Energy, Imperial college and Co-Chair IPCC Working Group III.
The Minister’s remarks – which addressed head-on the actions that pension funds and trustees can take, the power that they possess to drive change, and the “massive role” they have in terms of the transition – can be accessed here.
The co-hosts of the event also captured and distilled the key takeaways of a rich and varied discussion. Under the Chatham House rule, there are no remarks individually attributed. The tenor of the interventions around the table was that climate and the transition are being taken seriously, but that much more needs to be done – especially against the backdrop of the growing urgency of the challenge – and that, for their part, pension funds would welcome a more coherent approach across Whitehall on this agenda that also connects with the wider ecosystem.
As a backdrop for our discussion, Sustineri and A4S published a joint article in the FT’s Pensions Expert on the vital role of pension funds in addressing the transition – here.

 

For any questions, please do not hesitate to contact the partners of Sustineri.

 

Merseyside Pension Fund: Future-proofing its Responsible Investment Strategy

January 2019

Sustineri is pleased to announce that we have successfully completed an initiative with Merseyside Pension Fund (MPF), a large Local Government Pension Scheme in the UK.

This exercise involved working with a variety of internal and external stakeholders, with the objective of reviewing the schemes’s Responsible Investing strategy to future-proof their broader investment strategy. We hope that the emphasis throughout the whole process on strengthening investment beliefs through engagement and inclusivity can act as a model for when other pension funds (public and private sector) come to revise their responsible investment strategies, an agenda which is becoming increasingly important and material for asset owners.

Details of our report and recommendations can be found on the Merseyside Pension Fund website – here.

ClientEarth and Sustineri publish report on ‘Market Standards on Climate-related Risk for Asset Owners’