Can Your Pension Resist Climate Change? U.K. Funds Tally Risks

(Bloomberg) --

Scientists have concluded that without drastic action humanity is headed for potentially catastrophic climate change within two decades. The pension funds managing trillions over an investment horizon stretching toward the next century are grappling with a shorter-term challenge: quantifying the risks.

Britain introduced new rules this month that require retirement funds with more than 5 billion pounds ($6.72 billion) of assets to assess both their holdings’ impact on the climate and their ability to withstand the rapidly changing environment.

Now it’s up to fund executives like Victoria Barron, head of sustainable investment for the BT Pension Scheme, the U.K.’s largest company program with assets of about 58 billion pounds, to apply them.

“What’s going to be a challenge is data. For us, it’s really difficult as an international investor who essentially owns the whole market to get information across all of your asset classes.” said Barron. Managers are “being asked, as much as they are able, to figure out what to do with these really hard asset classes like sovereign debt, alternatives, infrastructure and private equity, where there just isn’t that information.”

Global Regulators

Barron’s task highlights the effort by officials around the world to get their arms around the fastest-growing sector in finance. The U.S. Securities and Exchange Commission, the U.K.’s Competition and Markets Authority and the European Commission are all seeking to tackle so-called greenwashing -- vague or overblown claims by ESG investing. 

The total asset value of U.K. pension schemes was 1.8 trillion pounds as of the end of September, according to the PwC Pension Funding Index. How these funds fare handle climate change could determine their ability to pay out to future generations of retirees.

“The regulation really is game changing for the industry. Pension funds will now have to be moving very quickly to come up with strategies, which for some will be for the first time,” said  Land, head of PwC’s Pensions Employer Covenant & Restructuring. “The decision for many will be between selling the riskier assets to avoid the risk or taking an active role and drive change within companies.”

Britain’s Pensions Schemes Act 2021 requires pension funds to produce an absolute emissions metric, emission-intensity metric and climate change metric for the funds assets, as well as scenario analysis for the resilience of its investment strategies for a temperature rise of 1.5 or 2 degrees Celsius among other things. The legislation will be extended to the remainder of the over 300 funds with over 1 billion pounds in assets from next year.

Making it tougher for the number crunchers, the funds have pushed in the past decade into alternative investments such as real estate and private equity, where ESG data is even more primitive than in equities. What’s more, sustainability risks around long-dated government debt -- the building blocks of most pension portfolios -- are also ill-understood, with the BT fund and Church of England Pensions Board among those looking to create a tool to assess the climate performance of sovereign bond issuers.

READ: A Climate Reckoning Is Coming for the World’s Government Debt 

Whatever the data, it all may just be too late. A pension fund could be required to first report these figures and plans as late as April 2023. Senior climate scientists have said emissions must have peaked by 2025 to keep global warming at 1.5 degrees Celsius.

“We are still running to catch up with the scale of the problem,” says Steve Webb,  a partner at Lane Clark & Peacock and former minister of state for pensions. “You just read the UN reports and think, a bit of reporting in a year’s time which will be incomplete and backward looking is still a small step really.”

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