How are schemes coping with the challenges posed by climate risk? And what are the solutions that managers and trustees can put in place

What is keeping you up at night? This was the question asked of a panel of experts at the PLSA Investment Conference in Edinburgh.

Top of the list was the problems posed by climate change. “This is the most frequent challenge to our investment strategy,” said Faith Ward, chief risk officer at the Environment Agency Pension Fund.


It’s hardly surprising. Climate change risk is definitely moving up the public agenda. And as it does, trustees are likely to find that members are more aware and therefore more likely to question what action a scheme is taking to do the right thing.

How much does it cost?

For many trustees this creates a dilemma. How much should schemes reasonably expect to pay ESG investments.

Chris Hitchen, the chief executive of RPMI was in the audience and summed the problem up quite neatly. He said: “There is still a dilemma between doing well and doing good.” He asked the panel whether these issues eventually match up, and therefore whether schemes whether they need to start taking a more long-term view.

The answer, overwhelmingly, was yes. Mark Fawcett, CIO at NEST, said that he considers climate change risk another financial risk. He pointed out that some of the youngest members enroled in the mastertrust are 17 or 18, and that by the time they come to retire, some of the existing risks may well have crystallised if schemes don’t tackle them now.

Schemes should look to employ strategies that should help schemes tackle climate change, without damaging investment returns.

What can schemes do?

The panel identified three broad courses of action; disinvestment, engagement and positive investment strategies. 

Wholesale disinvestment was ruled out as a course of action by the panel members, although Ward said that the EAPF has employed selective disinvestment where necessary. By and large this has been by adopting a zero-weighting strategy within a portfolio, which leaves the door open for reinvestment should the company start performing better from a climate change perspective in the future.

All three panellists talked about the benefits that engagement with companies can have. And trustees can look to band together through Red Line Voting or other coalition initiatives to increase the weight their voices carry.

However, schemes can also go a step further. Robert Waugh, chief investment officer at RBS, explained how investments such as windfarms can yield positive returns for investors whilst also providing added layers of diversification – such as ‘wind risk’.

Other areas that trustees may want to explore include waste to energy and sustainable timber.

Better data

In order to tackle climate change, schemes need to understand the risks they are running. And this is one area where trustees could and perhaps should expect to pay more.

Ward asked: “do you actually know how much climate risk you have in your portfolio? And whether it is being rewarded? You can’t know how much you should be paying if you don’t know how much risk you have.”

Fawcett agreed: “I think data is a real issue, it’s improving but we need more and better data to understand what those risks are.”

And Waugh argued that schemes should make an investment in better data and understanding. He concluded: “I don’t think you should lose return, but you should pay for better information to understand what risk you are running.”