Adrian Boulding: Have you had the ESG chat with clients?

Societal issues

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Adrian Boulding: "There are more and more innovative investments emerging with societal improvement or climate risk mitigation in mind when you start looking."
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Adrian Boulding: "There are more and more innovative investments emerging with societal improvement or climate risk mitigation in mind when you start looking."

Climate risk reporting is coming to a pension near you very soon, writes Adrian Boulding. Here he discusses the requirements and says now is the right time for advisers to talk to clients, find out what they are passionate about and tailor their investments accordingly

It seems climate risk reporting is coming to a pension near you very soon.

Following the signing of the Paris Agreement at the end of COP21 on 12 December 2015, the Financial Stability Body (FSB) chaired by one Mark Carney, articulated the need for better-informed investment, lending and insurance underwriting decisions to stimulate greater investment into our low carbon future and an orderly dis-investment from high carbon businesses.

The FSB wanted to improve understanding and analysis of both climate-related risks and low carbon future opportunities. Organisations would need to be encouraged to develop a resilient strategy for handling any physical impacts of climate change. They also must plan for transitioning to a low carbon economy.

So, on 21 January 2016, the new Task Force on Climate-related Financial Disclosure (later shortened to TCFD and often known simply as the Task Force) met for the first time to take up the climate-related financial reporting baton. Thirty-two senior individuals from major global banks, insurance companies, asset managers, pension funds, some of the largest non-financial corporations, accountancy groups, consultants, and credit rating agencies formed the new Task Force to lay out their recommendations for firms' Climate Risk Disclosure. The work took one and a half years.

Michael Bloomberg, chair of the TCFB, articulates it well in his open letter addressed to Mark Carney, dated 15 June 2017: "The Task Force's report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions.

"Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy."

The Task Force worked together to define the ‘principles and practices of effective disclosure' associated with climate risk or ‘Paris alignment'. Essentially this was about being able to use metrics and reports to understand whether what we are investing in is likely to fry the planet. The Paris Agreement specifically sets a target of preventing the Earth's temperate going up by more than two degrees Celsius over pre-industrial averages.

The agreed principles for effective disclosure are worthy of note.

Climate Risk disclosure needed to:

  • Represent relevant information
  • Be specific and complete
  • Be clear, balanced, & understandable
  • Be consistent over time
  • Be comparable amongst companies within a sector, industry, or portfolio
  • Be reliable, verifiable, and objective
  • Be provided on a timely basis.

Asset managers are already starting to report the sustainability of a given portfolio against a stated benchmark and as early as next year, occupational pension scheme trustees will need to do the same.

Yes. Work and pensions secretary Therese Coffey, introduced the proposed additions to Pensions Scheme Bill (now going through the House of Commons with Royal Assent confidently expected by Christmas) in a landmark speech on 26 August 2020 in Glasgow, as follows: "These proposals would see the UK become the first major economy in the world to require climate risks to be specifically considered by pension schemes and will ensure trustees are legally required to assess and report on the financial risks of climate change within their portfolio."

The new law will affect the 100 largest occupation pension schemes (OPS) and all master trusts by the end of 2022, ensuring climate risk communication reaches 80% of OPS members by the end of 2023. Using these largest schemes to set an industry standard, around 250 more schemes with £1bn plus in assets would then have to meet the same requirements in 2023.

Essentially, the DWP is set to take powers to mandate climate risk governance and TCFD reporting. And the new Pensions Climate Risk Industry Group (PCRIG) is due to hand non-statutory final guidance for climate risk reporting trustees by the end of this year.

What will this mean for you and your clients in the next 12 months or so? Well, not much in the short term as right now only about one in five (21%) occupational DC schemes are taking climate change into account when formulating their investment strategies. However, all this must change as new legislation will demand it. Perhaps more importantly, so will your clients.

Dunstan Thomas found out that a good portion of next generation of retirees - Generation X, aged 40 to 55 this year, is already very keen on investing in funds and businesses which do good either for the planet or society at large.

From the nationwide study we conducted late last year, we found that nearly one in five Gen Xers (18%) already consider environmental, social and governance (ESG) factors in the investments they select to a greater degree today than they did just two years ago.

A further 9% think ESG matters ‘a little more' than it did two years ago. And just a tenth of Gen Xers think that financial performance is ‘the only measure of value of companies' that they are investing in directly or indirectly through funds.

Attitudes are changing as we witness the increasing interconnectedness of the planet in areas like the proliferation of plastic packaging, greenhouse gas emissions, depletion of the polar ice caps, with global warming and, this year in particular, pandemics.

If you want to check out the Paris Agreement-alignment of your clients' portfolios that's going to be tricky right now. However, if you look hard enough you may see an ‘implied temperature rise' or ITR number against many portfolios.

These will have to published and investment managers' rationale for their scoring detailed, in annual benefit statements. Statements should detail associated climate risks and opportunities presented to businesses inside the portfolio.

If publicly-listed firms do not have a good story to tell about how they are lowering their greenhouse gas emissions, increasing recycling in their premises, reducing waste and water utilisation and much more besides, then they will start to be marked down. If they have no story on seizing opportunities associated with transitioning to a low carbon future, then their valuation is likely to be marked down by analysts and pension fund trustees alike.

Other than checking the ITR rating of current holdings, IFAs might want to take the opportunity to have a wider ESG values discussion with their clients. Find out what charities they support and which planetary or societal issues they are most concerned about and see if you can persuade them to begin reflecting these concerns in a small portion of their investment portfolio at this year's review.

For example, if the growing homelessness problem worries one of your clients, you might point them towards a new real estate investment trust (REIT). The recently launched ‘Home Reit', set up by Alvarium, aims to alleviate the homeless problem across the UK, while targeting inflation-protected income and capital returns. The trust will invest in a diversified portfolio of assets across the UK, dedicated to providing accommodation to the homeless.

There are more and more innovative investments emerging with societal improvement or climate risk mitigation in mind when you start looking. It's a great way of aligning your clients' deeper concerns and desires with their investment portfolio.

By doing so, you may well secure increased engagement from them. And it's a far better way for you demonstrate that you're in tune with modern climate concerns than turning up to meetings on a bicycle.

Adrian Boulding is director of retirement strategy at Dunstan Thomas

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