Pavan Bhardwaj, Trustee Director at Ross Trustees, outlines his three key takeaways from COP26 and their implications for the pensions industry.
- Leaving aside the question of whether the final COP26 deal should be deemed a success or just ‘blah, blah, blah’, the direction of travel for UK pension funds seems clearer than ever. Trustees can expect more scrutiny on their asset allocation decisions and on the quality of their stewardship. Larger schemes are already caught by TCFD, but smaller schemes may want to take proactive steps in anticipation of the TCFD regime ultimately being broadened.
- Greater pressure is likely to be placed on investment managers to provide relevant data and on advisers to ask the right questions. Meaningful and durable partnerships between trustees and advisers will be key to ensuring portfolios are positioned appropriately to mitigate both direct risks of climate change, transition risks and implications for covenant. Fiduciary managers are arguably a beneficiary, particularly those managers who can utilise benefits of scale to exert leverage on managers or offer a more bespoke approach for clients.
- A more philosophical question for trustees and the pensions industry as a whole, is whether TCFD and particularly the requirement to set targets around carbon have effectively modified the traditional risk and return framework for pension funds. We would all agree that climate change is ‘financially material’, but recent events have shown that this materiality cuts both ways. Is it acceptable for advisers to advocate a tactical allocation to oil and gas in anticipation of the supply squeeze in commodities? Arguably not.