Trustees can no longer ignore climate change, it is a real and present threat

Schemes can no longer ignore climate change. That was the overwhelming message from the PLSA Investment conference in Edinburgh.

There are two reasons for this. The first, and most important, is that governments have decided to take action.

ESG Sustainable Growth

So whether schemes buy into the dangers of climate change or not – the upshot of the Paris convention is that decarbonisation is firmly on the agenda, which will impact schemes’ investments.

Christiana Figueres, executive secretary, United Nations Framework Convention on Climate Change said: “We are decarbonising the economy, that is unstoppable.”

David Adkins, chief investment officer at the Pensions Trust added: “Treat climate change risk like you would any other significant risk. Climate change risk is not going to go away soon. 196 world leaders did not turn up [to Paris] on a whim. They turned up to debate their personal and collective response.”

He argued that pension schemes need to do the same.

Treat climate change risk like you would any other significant risk”

Jane Ambachtsheer, head of responsible investment at Mercer agreed. She said: “Climate change is a reality accepted by virtually every government. It is not an ethical consideration… There will be an increasing need by the investment community to measure, monitor and report on climate change.”

Decarbonisation creates are risks and opportunities. Schemes need to take a look at their investment portfolios and decide which assets will do well and which will do badly.

Despite this pressing need, institutional investors continue to have poor engagement on the issue. In fact, Figueres said that while the sector could have the greatest impact on climate change paradoxically it is the least proactive.

But this is short-sighted. Unless investors engage – they will inevitably lose out as decarbonisation is priced into the market.

How do we live in an uninsurable world?”

And it’s not just the investment considerations. There are implications throughout the economy, particularly for insurers.

Figueres said: “If we do not address climate change in a timely fashion, should we go above 2%, the insurance sector has already decided that the world will be uninsurable. How do we live in an uninsurable world?”

Of course, there are ethical considerations as well. Irrespective of varying beliefs on the causes of climate change, the fact remains that the level of current carbon emissions could cause serious environmental harm.

Figueres said: “The quality of the investment equals the quality of energy and that equals the quality of life on this planet.

“That really is an amazing responsibility that sits on the shoulders of those that are making investments over the next five years.”

Focus on the financial risk not the emotional arguments”

And awareness of the problem is gaining ground with the public. Ambachtsheer told the audience: “If you haven’t yet been approached with a question about how you are managing climate risk you can expect to be, either from beneficiaries, from activists or from regulators.”

Trustees who want to act on climate risk should focus on the business and investment impications, rather than the ethical.

Adkins concluded: “When you debate this is trustee meetings, focus on the financial risk not the emotional arguments. [Climate risk] continues to be treated as an ethical issue and is prioritised as one, I think that is a mistake.”