There has been much press comment recently, following the HSBC UK Pension Scheme’s decision to adopt a climate change focused fund as its default for its DC members. What will this mean for DC (and DB) schemes in future?
What is a climate change focused fund?
There are various versions of these funds available. What they have in common is a strong focus on low carbon investments, or businesses targeting a reduced carbon footprint. They achieve this by screening potential investments against strict criteria to assess each investment’s impact. Whilst it would be easy to exclude fossil fuel companies for example, other investments will be more nuanced. However, the Montreal Carbon Pledge commits those investment managers who have signed up to disclose the carbon footprint of all their equity funds. Managers will therefore have much of the information and will have already carried out the analysis on existing and potential investments.
Are these funds the future?
A number of pension schemes’ existing investments will naturally have a lower carbon footprint than the FTSE All Share, or even the MSCI World, particularly if they tend to favour sectors other than energy for example. In addition, many companies have improved their
environmental reporting in recent years and may have already become carbon neutral (e.g. Microsoft), or may be targeting specific reductions in carbon emissions, reduced water usage in manufacturing and reduced waste for example.
For actively managed funds, the manager will already be assessing the potential impact of climate change when making investment decisions. It is for the Trustees (and their advisers) to determine if their decisions are sufficiently robust.
Implications for pension schemes
The investment decision made by the Trustees of the HSBC Scheme has certainly raised the profile of these investments and we expect to see some of the following during 2017:
• greater disclosures in Schemes’ Statements of Investment Principles on ESG issues, including climate change
• questions for active fund managers on how they manage the risks associated with climate change
• perhaps a greater focus on “green” default investment strategies for DC schemes
This will be an interesting area to watch and one we are certainly talking to clients about (not just DC clients).
Amanda Burdge
amanda.burdge@quantumadvisory.co.uk
