Articles - DWP turns up the heat on Stewardship

The heatwave which hit the UK brought home the reality of living and working in high temperatures. Airport runways melted, railway lines buckled, and overhead lines sagged stopping trains in their tracks. It would be difficult to deny the physical risks that come with global warming, and it seems common sense to limit climate change rather than spending billions of pounds adapting infrastructure to cope with high temperatures. Pensions have a key role to play in tackling climate change.

 By Dale Critchley, Workplace Policy Manager, Aviva
 Not only in terms of responsible investments but also in helping protect members from the impact on their pension income from transitioning to a low carbon economy.

 The potential economic impact can be gauged by looking at the price of UK carbon allowances under the UK Emissions Trading Scheme (ETS). These were trading at £44 in July last year and reached over £83 in July this year. The price is not yet high enough to incentivise companies to drive down emissions, but prices are likely to continue to rise as allowances are cut each year. The clear message to those in-scope industries is that they need to act to either reduce emissions or accept higher costs.

 There are three ways pension schemes can reduce their carbon intensity and the financial risk to members.

 Offsetting should probably be a last resort. An individual might increase the cost of their holiday by paying to offset the environmental impact of a flight, but this philanthropic approach does not seem to work with pension schemes. Even if the cost to offset the environmental impact is paid for by the scheme, the sole source of income for Defined Contribution (DC) pension schemes is usually member charges. Therefore, all roads lead back to the charges paid by pension scheme members so you could say the offsetting is paid by the member one way or another. There is the added a risk that offsetting diverts attention from the real financial risks of investing in firms with no long-term plan for a low carbon economy.

 The second way to reduce emissions in the long-term is to work with firms which are on a journey towards net-zero. While it might seem straight-forward to divest from those firms with higher emissions it might be considered, as the pensions minister has asserted, an “abrogation of trustee’s responsibility” . The approach of the Aviva Master Trustees and Aviva Investors is to work with firms to understand and encourage their move to a lower carbon strategy.

 This third way is Stewardship. The exercise of investor power to make changes from the inside and is the focus of new Department for Work and Pensions (DWP) guidance for trustees. The guidance makes it clear that although trustees can delegate voting rights to fund managers, they should develop their own stewardship priorities based on - amongst other things - their investment beliefs and assessment of the risks to which members are exposed. When it comes to achieving these aims the first step is to ensure a fund manager’s thinking is aligned on trustee priorities at the point the manager is selected. Trustees should also consider whether it is appropriate to provide the fund manager with an expression of wishes, which sets out how they would like their scheme’s voting policy to be followed. They should consider whether to adopt the Association of Member Nominated Trustees Red Lines or join collaborative investor initiatives. Trustees are also encouraged to engage with asset managers at least annually to discuss voting policies and set out their viewpoints ahead of each voting season.

 While this adds to an already full agenda for trustees it is vitally important for trustees to flex their financial muscles to make sure that the pension schemes investments are working in their members’ interests.


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