Next climate summit inspires early movers

As expectations build for the pivotal United Nations climate-change conference this fall, many asset owners, managers and regulators are not waiting to take action.

The goal of what is known as the COP26 summit beginning Oct. 31 in Glasgow, Scotland, is to accelerate action toward the goals of the Paris Agreement and the U.N.'s climate-change framework.

Before then, many pension fund officials and regulators are taking matters into their own hands, stepping up commitments to net-zero emission goals and to enhanced disclosure recommended by the Task Force on Climate-related Financial Disclosures.

One ambitious move came July 14 when the European Commission unveiled a sweeping package of legislative proposals to reduce net greenhouse gas emissions by at least 55% by 2030. The "Fit for 55" package is part of the European Green Deal aimed at making it the first climate-neutral continent by 2050. The ambitious plan calls for new policies on climate, energy, land use, transportation and taxation to achieve 55% lower emissions than 1990 levels.

For pension fund officials, it's about upholding their fiduciary duty to provide long-term, risk-adjusted returns to their members.

That was the motivation for pension fund chairmen overseeing a collective £267.9 billion ($372.2 billion) in pension assets in the U.K. and Australia on July 14 to commit to net-zero emissions targets and to align their investment portfolios with a path toward a temperature increase of 1.5 degrees Celsius, among other actions. The 14 signatories to the A4S Pension Fund Chair Net Zero Statement of Support pledge coordinated by the Accounting for Sustainability Project at the Prince of Wales's Charitable Foundation include the chairs of HSBC Bank Pension Trust U.K. Ltd., Barclays U.K. Retirement Fund, Unilever U.K. Pension Fund, Tesco PLC Pension Scheme, BT Pension Scheme, National Employment Savings Trust, Scottish Widows Master Trust and Health Employees Superannuation Trust Australia.

The chairmen recognize what is at stake for pension funds, and what they can do, said Jessica Fries, executive chairwoman of the Accounting for Sustainability Project, in a statement. "Pension schemes are highly exposed to the risks of an unsustainable future, but also powerfully positioned to influence a sustainable outcome," Ms. Fries said.

RPMI Railpen, London, which manages £32 billion in assets on behalf of railway pension funds, got on the bandwagon the following week, announcing plans to deliver a net-zero portfolio by 2050, with a 50% reduction in greenhouse gas emissions by 2030 and net-zero emissions by 2050 or sooner.

"You are going to see more and more of this," said Matt Christensen, Paris-based global head of sustainable and impact investing at Allianz Global Investors, with $703 billion in assets under management.

When the U.K. pension funds make this sort of commitment, "they are putting asset managers on notice. That's a very powerful message to the asset management industry and potentially anticipating the regulatory direction in the U.K.," Mr. Christensen said.

"It's bold because it's a group of asset owners based in one market. We would expect that U.K.-based pension funds will bring this topic up with their asset managers as part of a future expectation. I see this initiative as part of the trend we are seeing around climate announcements in light of the upcoming COP26 in Glasgow," Mr. Christensen added.

Border to Coast Pensions Partnership, Leeds, England, one of the U.K.'s largest public-sector pension pools with £55 billion in assets, recently reported that all investment funds in its responsible investing portfolio of £24.7 billion are materially below their respective benchmarks for carbon intensity. The results followed steps that included selling off several big carbon emitters, introducing carbon screens for equity and fixed-income funds, and a monitoring framework for external managers. The pool is owned by 11 local government pension funds.

U.K. retirement plans with at least £5 billion in assets will have to assess and report on their portfolios' risks from climate change as early as October under regulations being considered by Parliament. Plans smaller than £5 billion would start in 2024.

Part of the Pension Schemes Act 2021, the new regulations to be implemented by the U.K. Department for Work and Pensions will require trustees to identify and evaluate climate risks and opportunities that might affect investment strategies over the short, medium and long terms, and to annually disclose the carbon emissions of their portfolios. They must also conduct scenario analysis, calculate climate metrics, set climate targets and review performance against them.

The regulations — which would make the U.K. the first among leading industrial nations to have retirement fund trustees address the financial risks of climate change, according to the DWP — came closer to reality July 21, when the regulator published final statutory guidance for plan trustees, as the regulations await final approval from Parliament.

Asset owners are also pushing regulators in Europe, the U.K. and elsewhere to take up carbon pricing through a mix of emissions trading and carbon taxes. That was the call in a July discussion paper from the U.N.-supported Net-Zero Asset Owner Alliance, whose more than 40 members representing $6.6 trillion in assets under management have already set science-aligned emission reduction targets for 2025.

Using a carbon price corridor as a benchmark for strategic decisions consistent with a low-carbon economy "will provide the global environment necessary for companies to make sound investment decisions and for investors to support them in the decarbonization of the real economy," said alliance member Charles Emond, president and CEO of the C$365.5 billion ($293.6 billion) Caisse de Depot et Placement du Quebec, Montreal, in comments on the paper. CDPQ had 10% of its overall portfolio in low-carbon assets as of Dec. 31 and has reduced its carbon intensity by 38% since 2017, well above a previous 25% goal.

The prospect of carbon pricing is being raised more frequently as COP26 approaches.

In early July, G-20 finance ministers and central bank governors meeting in Venice, Italy, raised the idea of carbon pricing as a potential tool for lowering greenhouse gas emissions that countries can use to coordinate tactics for dealing with climate change, which they said in a communique poses "increasing physical and transition risks to macroeconomic outcomes and to regulated financial institutions and financial stability."

The next day, the G-20 Climate Summit saw eight of the world's largest insurance companies launch their own net-zero insurance alliance, with commitments to transition underwriting portfolios to net-zero greenhouse gas emissions by 2050 and to decarbonize their investment portfolios by 2025.

The policymakers and financial regulators also heard from ESG advocates such as Linda-Eling Lee, New York-based managing director and global head of ESG research for MSCI Inc., whose indexes benchmark more than $14.5 trillion.

"As we look forward to what COP26 could achieve, we urge policymakers and financial regulators of the G-20, and the rest of the world, to introduce mandatory climate-related disclosures and agree on international standards of disclosure," she told them. A market infrastructure that supports sustainability should include new measurements that show how vulnerable or how resilient every asset is to climate change, she said.

Not to be outdone by their asset owner counterpart, the Net Zero Asset Managers Initiative, whose 129 signatories manage more than $43 trillion in assets, also called on governments to act on climate change.

Just six months after it was launched to commit to achieving net-zero emissions with clients, the group now claims to represent nearly half of the entire asset management sector. That prompted Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change, to call the growth in signatories "a fundamental tipping point across the investment sector and a significant boost in efforts to tackle climate change and decarbonize the global economy."

By the time people show up in Glasgow, there will be plenty to talk about.