The rise of green pension funds

This marks another milestone in the push to be “green” when investing. Plan members already expect to see a responsible investment approach from their managers, adding to the pressure on administrators to produce a cohesive and measured sustainability strategy. These disclosures will further fuel a movement toward responsible pension investing.

In July 2021, Pensions Minister Guy Opperman described climate change in no uncertain terms, as “a major systemic financial risk and a threat to the long-term viability of UK private pensions”. Although the challenge is very real and very clear, finding the right green retirement solution is unfortunately not always so simple.

Everyone wants their investments to contribute to the transition to net zero, but there is significant debate about how best to make a difference and whether considering ESG will affect financial performance.

Empower investors

At Coutts, we believe that only by understanding what actions investment managers are taking are truly making a difference to business sustainability and profitability can we have the greatest impact on the transition to net zero.

Increased knowledge and communication about effective ESG investing is the key to meaningful change. The default response for many people is to simply shift their allocations to so-called “green” investments, or those that already derive most of their income from sustainable activities. Yet the reality is that simply shifting investment from fossil fuel companies to solar farms will not be enough to make a difference for the planet.

Such a shift ignores businesses that need help transitioning to a net zero economy and already have credible plans to do so, even if they aren’t there yet. We are fully aware that sustainability is a journey that cannot be undertaken alone. It is critical that we engage with businesses at every stage of their net zero journey and help them change for the better. Research shows that collaboration and engagement add value, as well as being a truly sustainable approach. At Coutts, we want to lead by example and encourage others to do the same.

The role of investment managers

Discovering which companies are making a credible transition to net zero requires serious engagement. It relies on a deep understanding of a company’s operations and strategy, which requires connections and expertise from investment managers, rather than a knee-jerk divestment response. Managers who truly engage, challenge, and are willing to challenge the practices in which companies engage can effectively manage risk for pension funds, as well as impact the planet.

By engaging on these issues, rather than simply divesting, managers can create value and improve results.

A focus on engagement

At Coutts, when choosing where to invest, we focus on stewardship, both through voting and engagement, as well as ESG integration. We know that how a company responds to its investors, as well as how it integrates its ESG objectives, can be financially important – as these aspects of governance are indicative of good risk management and understanding. .

We are also aware that there could be positive financial results when investors interact with issuing companies due to their low ESG ratings. For example, a 2021 study found that engaging with companies with low ESG ratings could be correlated with financial outperformance relative to their peer group.

The future of green pension funds

As the transition to net zero continues, we will all have a responsibility to engage with the companies we invest in about their investment approaches, climate risk and their plans to reduce it.

Government decrees regarding climate change reporting are important, but they can’t do much. It is also up to us as investors to engage positively with the businesses we own, to make the biggest difference possible and to mitigate climate-related risks for our members.

At Coutts, by maintaining our disciplined approach to the companies we invest in and continuing to challenge them on their path to net zero, we know we are taking a truly sustainable approach to investing that is best for our clients and the planet. .

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