What’s stopping us from using our pension pots to fight climate change?

Posted On: 
19th November 2019

Ensuring that our principles are respected in the investments we fund with our savings is one of the battles of our generation, writes Maria Busca. 

Asset managers have come under fire due to their assessment of ethical investment categories, writes Maria Busca.
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In September, Pensions Minister Guy Opperman called on the pensions industry to utilise “the incomprehensibly colossal amount of money” it holds and invest it in the fight against climate change.

The minister noted there were “dark clouds on the horizon” and referred to asset managers as the gatekeepers of this capital, calling on them to change their attitudes towards tackling climate change. According to a survey by UK Sustainable Investment and Finance Association, 47 percent of fund managers have no private nor public corporate commitment to achieving the targets of the Paris agreement and only 18 percent have set deadlines for engagement objectives.

Guy Opperman MP: Let's utilise the 'incomprehensibly colossal amount of money' of pensions industry

Environmental Social and Governance products are not always what they seem

Despite their crucial role in fighting climate change, asset managers have come under fire with regards to their assessment of ethical investment categories more broadly.

It has recently emerged that according to research conducted by wealth manager SCM Direct, funds such as L&G Future World and Vanguard SRI products have significant exposure to sectors such as tobacco, gambling and defence. This led SCM founders Gina and Alan Miller to call for the FCA to review the ethical investment sector. In response, Vanguard reportedly said “there are different flavours to socially responsible investing”.

Royal London Asset Management has written in a blog on FT Adviser that there is “so much hyperbole and double counting” in the industry that “impact investing has become meaningless”, despite initially sitting somewhere in between positively screening investment choices and philanthropy. In addition, it has also been reported that managers charge multiple of the fee for a standard tracker fund to ‘go green’.

Progress in policy

There has been much progress in policy developments aimed to help investors better translate their principles into asset managers’ investment choices.

These include the recently released new stewardship code extending now to all asset classes and encouraging deeper thinking towards the interests of the end investors; the FCA’s new duty for IGCs (Independent Governance Committees) to report on their firms’ policies on ESG issues and the FCA’s new requirements for asset managers and life-insurers to disclose how they engage with the companies they invest in and create long-term value.

But with so many metrics, criteria and arbiters of what is ethical, green, responsible and sustainable, it is easy to see how both investor confusion and potential deceit could occur.

Common taxonomy is a potential solution, but not an easy one

Common classifications and metrics would arguably tackle the core of the problem more directly, although this is not a simple solution. The European Union have already moved in this direction focussing on tackling climate change, working on an EU taxonomy that banks and funds would have to comply with to launch green products. The aim is to help investors identify environmentally friendly activities.

The European Commission hope that asset managers marketing investment products as environmentally sustainable would be compelled to explain whether, and how, they have used the taxonomy criteria. The aim is to get an agreement between the EU Parliament and EU member states by the end of the year but… TO READ MORE AND DOWNLOAD A FREE 1-MONTH LOOK-AHEAD CLICK HERE.