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Climate change and pension investments – we answer key questions

Gareth Trainor | October 18, 2021

Time to read: 5 minutes

Gareth Trainor,

With all eyes on COP26, how are climate risks changing the way we save for the future? Sindhu Krishna, Head of Sustainable Investments, and Gareth Trainor, Head of Investment Solutions, discuss how this critical issue is transforming the design of pension solutions.

Sindhu, why is climate change important for investors and pensions?

Climate change presents risks and opportunities to the world around us. As a long-term investor we must consider both aspects for our investment portfolios, on behalf of our pension scheme members.

We cannot ignore the potential impacts in the short, medium and long term from climate change on the world economy, the valuation of investee companies and therefore on our customers’ pensions and savings. Equally, we need to ensure that we pro-actively go after any opportunities that climate change presents to us as investors.

By truly integrating the broader environmental, social and governance (ESG) considerations into the investment decision-making process, investors can aim to drive more sustainable outcomes, help improve the resilience of their portfolios, while also maintaining, or indeed potentially improving, their financial returns.     

Gareth, what are customers telling you about climate change and their pensions?

The level of risk and returns are still the top priorities for the majority of our customers. However most want to achieve the balance of a good return without harming society or the environment. These are the customer views that we continue to find in our ongoing responsible investment research.

When it comes to responsible investment issues, climate change comes out as the factor most important to customers.

Meanwhile 85% of respondents said they expect Standard Life to consider how responsible all their investments are – not just those labelled as responsible or environmental, social and governance (ESG).

In short, our research is telling us that customers need us to deliver on their financial goals – but they also want reassurance that we’re doing this in a responsible way.

Can you explain a bit more, what does that mean for default design and what you offer alongside it?

The customer focus is on risk and returns, which is understandable as that’s why they save in the first instance. So our approach is anchored in managing the financial risks and opportunities surrounding ESG, rather than taking moral judgements.

At Standard Life, that equates to offering defaults that primarily aim to improve pension pot returns over the long term, but that also have a clear strategy to integrate ESG considerations within the investment process. This strategy ‘avoids the bad’ by screening out some companies, ‘improves the good’ by tilting to those helping to address sustainability challenges, and ‘drives change for the better’ through active stewardship and engagement.

Alongside this we also offer a choice of self-select options for customers who want to tap into specific moral, ethical, environmental or social goals. It’s a topic I cover in more detail in ESG and your default – financials vs ethics.

Our responsible investing approach goes beyond minimum requirements – we’re not just excluding, we’re actively aiming to improve outcomes. Ultimately, we want to make a real, tangible difference in all our investments.

Sindhu, can you tell us about your net zero targets?

As part of Phoenix Group, Standard Life is committed to net zero targets for our investment portfolios. We’ll reduce our carbon emissions by 25% by 2025; by at least 50% by 2030 and to net zero by 2050.

As Gareth has said, this is about real change – not just reshuffling investment portfolios. Our ‘Net Zero’ strategy has three strands; decarbonisation of investment portfolios, engaging with investee companies for change (stewardship), and investing in opportunities or climate solutions.

We’re increasing investment in companies with climate strategies and those coming up with solutions to help tackle climate change. These are the businesses and technologies needed to support decarbonisation in the real economy. As a last resort, we’ll also disinvest from those companies failing to meet our climate standards.

Stewardship is incredibly important; a powerful tool in driving genuine improvement in sustainability. It’s about encouraging the companies we invest in to reduce their climate impacts. The investment managers we work with engage to bring positive change in the investee companies. Given our size and scale, we believe we can do even more. So we’re building a team and the infrastructure to help us play a more active role.

We’re really excited about our Net Zero strategy. And from a wider perspective, it’s exciting to see energy behind the need to change. Actions and plans to transition to a low-carbon world – that’s what we’re looking for.

And Gareth, which developments are you most excited about?

Moving so many of our existing customers into sustainable solutions. As I’ve said earlier, our research shows that customers expect us to be investing responsibly regardless of the labelling. So to be making these changes en masse – with tens and potentially hundreds of billions of pounds – really makes me proud.

Sindhu, how do you see sustainability issues, such as climate change, changing investments over the next five to ten years?

We’re observing a shift in capital towards greener investments and away from those that are more exposed to risks of climate change and not showing progress in transitioning. I only see this increasing over the coming years.

The industries that fail to adapt and keep up with transition requirements could end up becoming a smaller part of our society. They’ll be replaced by innovative companies that are seeking to help solve the climate crisis, or at the very least not add to it.

Gareth, what would you add to this?

I believe that we’ll see companies en masse starting to embrace the climate change agenda. It will become a ‘norm’. So people’s investments, including their pension, will be managed with this in mind – likely towards simple, easy to understand goals, such as the net zero targets many companies are setting; including Standard Life.

I hope we also begin to see a greater commitment to address sustainability issues other than climate change.  Issues such as diversity, or poor corporate governance, need to be considered if we’re to drive real change for the better.

As I’ve said many times, its pointless feeling good about a windfarm investment if the manufacturing of the turbines uses slave labour, production methods that pollute local rivers, and the lack of good corporate governance prevents engagement and positive change in this space.

To me, the next five to ten years is critical in the evolution of how we tackle climate change – but it’s also about how we incorporate the wider responsible investing agenda.

Find out more

You can read more about these topics in Gareth’s recent articles ESG and your default – financials vs ethics and A good time to use responsible investing to engage members.

Standard Life is part of the Phoenix Group. You can read about their sustainability commitments here.

Phoenix Group is a signatory of the following initiatives:

  • UN-supported Principles of Responsible Investing (PRI)
  • Net-Zero Asset Owner Alliance (AOA)
  • Institutional Investors Group on Climate Change (IIGCC)
  • Climate Action 100+
  • Task Force for Climate Related Financial Disclosures (TCFD)
  • Science Based Targets initiatives (SBTi)
  • ABI Climate Change Roadmap
  • Sustainable Markets Initiatives (SMI)  Insurance Taskforce

 

The information here is based on our understanding in October 2021 and shouldn’t be regarded as financial advice.

The value of investments can go down as well as up and may be worth less than what was paid in.

Standard Life accepts no responsibility for information contained on external websites. This is for general information only

Gareth Trainor

Head of Investment Solutions

Gareth has overall responsibility for Standard Life’s investment solutions covering a wide range of activities including solution design and development, data and reporting, fund and pricing controls and governance.

He is also Chair […]

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Gareth Trainor

Head of Investment Solutions

Gareth has overall responsibility for Standard Life’s investment solutions covering a wide range of activities including solution design and development, data and reporting, fund and pricing controls and governance.

He is also Chair […]

Read Gareth's blogs
Gareth Trainor,

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