Pensions and investments: overlooked aspects of CSR

Claire Jones, member of the IFoA’s Resource and Environment Board and chair of its ESG Investment Working Party, reviews the often overlooked sustainability implications of pension scheme investments.

It is not uncommon for company-sponsored pension schemes to have hundreds of millions, if not billions, of pounds of assets. This money is invested throughout the economy in equities, bonds and other assets, and the way it is managed has an important influence on climate change and sustainability more generally. Yet relatively few companies have considered the sustainability implications of their pension scheme’s investments, potentially leading to misalignment with the company’s corporate social responsibility commitments and unintended exposure to sustainability risks.

This is starting to change. The PRI (Principles for Responsible Investment) highlighted the issue in its report Aligning Values. The Pensions Regulator has said that it expects pension scheme trustees to assess the financial materiality of factors such as climate change and responsible business practices and to allow for them accordingly in their investment strategy. And the PLSA (Pensions and Lifetime Savings Association) has just issued More light, less heat: A framework for pension fund action on climate change.

Actuaries and investment consultants have a key role to play in helping pension scheme trustees and sponsoring employers to consider sustainability issues. The Institute and Faculty of Actuaries (IFoA), the chartered professional body for actuaries in the UK, is supporting its members in this.

Actuaries and sustainability

The IFoA has been engaged with sustainability issues for more than a decade. Our initial work considered the implications of climate change for general insurers, concentrating on the physical risks. Over time, our focus expanded to include the investment implications of climate change, as awareness grew of transition risks such as the potential for fossil fuel assets to become stranded. We also sought ways of applying our long-term risks management skills outside our traditional areas of expertise, such as by bringing an insurance company perspective to climate risks. For example, in a report sponsored by the Foreign and Commonwealth Office, one of our former presidents advised that “one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably small value”.

In May 2017, we issued a risk alert to our members, advising them to “ensure that they understand, and are clear in communicating, the extent to which they have taken account of climate-related risks in any relevant decisions, calculations or advice”. However, we recognise that identifying climate-related risks is much easier than developing practical ways of taking them into account in actuarial work. The IFoA’s Resource and Environment Board is therefore developing a series of practical guides to help actuaries follow the risk alert. The first guide was written for actuaries advising defined benefit pension schemes and others are in the pipeline.

The IFoA also provides thought leadership on sustainability topics. In 2015, we carried out a literature review of Sustainability and the Financial System, identifying areas for further research. More recently, our series of inter-generational fairness bulletins investigated the topics of climate change, retirement, and health and care. We respond to relevant policy consultations, supporting measures such as carbon pricing, better climate-related disclosures and clarification of investors’ fiduciary duties to allow them to take account of environmental, social and governance (ESG) issues.

We recognise the need to channel capital to support sustainable outcomes. This includes financing the massive investment in infrastructure that is needed to transition to a low carbon economy. We were delighted to co-host a recent roundtable with the Aldersgate Group on the importance of climate and other environmental factors for infrastructure investments, focusing on the risks facing infrastructure investments.

More generally, investors such as pension schemes and insurance companies, need to integrate ESG factors throughout their investment processes. The IFoA’s ESG Investment Working Party was set up in early 2017 to catalyse additional activity on this topic, reinforced by the IFoA’s commitment to support ESG integration as a network supporter of the PRI.

Looking ahead

2017 has seen a big increase in awareness of climate-related risks within the pensions and investment industries. I expect this to continue into 2018, with emphasis shifting from awareness to practical action. Companies can support this shift by asking the trustees and independent governance committees that oversee their pension schemes how they are addressing climate-related risks.

Claire Jones is a member of the IFoA’s Resource and Environment Board and chairs its ESG Investment Working Party.