Using investor influence to combat climate change
LCP’s five climate policy asks
We can see that climate change is a huge issue. It’s not something we can solve alone, or address with simple divestment action. Instead, climate change requires huge collaborative action. It needs civil society, individuals, policymakers, companies and of course investors to all come together and take action.
We believe that pension schemes can, and must, play a key role in taking this systemic action.
Climate change is a systemic risk
Climate change is a financially material systemic risk that needs addressing.
Achieving net zero emissions by 2050 is more than just a target or strategy; it has real implications for the world we live in, the financial stability of our markets, and current and future pension pots. The actions we take today will shape how the world looks in 2030, 2050 and beyond, and will impact everyone – including, of course, pension scheme members.
To address the potentially devastating impacts of climate change, the world needs to align with limiting warming to 1.5°C above pre-industrial levels. The policies we have in place across the world are currently not strong enough to do this, and implementation of these policies is falling short of what has been promised.
If we carry on as we are, we could end up in a situation where we see a huge rise in natural disasters, more and more of the planet becoming uninhabitable (leading to mass migration), buildings and property being destroyed. All of this is likely to lead to severe social unrest and serious financial damage – GDP is likely to fall significantly and we could even see a collapse in the whole financial system.
To address climate change, 'systemic stewardship' is essential
That’s why we have developed a set of five climate policy asks
These policy asks guide our own systemic stewardship activity at LCP, as we want to ensure that we are using our own influence to drive forward the best possible climate outcomes for the members we ultimately serve.
We also know that our voice is so much more powerful when we have the voices of pension schemes behind us.
We recently invited asset owners to support these asks, and 49 asset owners with assets totalling £184bn have already done so*.
* Except the fiduciary duty ask, which has the support of 41 asset owners with assets totalling £153bn.
I'd like to find out more about supporting LCP's climate policy asks
Contact usOur climate policy asks
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What does this mean in practice?
- This ask is motivated by our experience working on TCFD reporting for pension schemes.
- There are benefits to TCFD reporting - for example, it allows pension schemes to be held publicly accountable to taking actions on climate change, within a clear framework.
- However, we have seen many trustees spend a disproportionate amount of their time and governance budget on producing TCFD reports, and often insufficient time is spent on actions that could make a concrete difference to member outcomes.
- We therefore believe that regulations should focus on actions that align with real-world impact. Reporting should be seen as a tool to facilitate that, rather than the main focus of the regulatory requirements.
What outcomes are we hoping to see?
- Pension trustees spend time on changing how their scheme’s assets are managed, in ways that reduce the risks to the assets and/or contribute to a more sustainable financial system, hence better outcomes for members.
Related insights
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What does this mean in practice?
- A significant amount of investment is needed in climate solutions to successfully transition to a net zero economy. Many climate solution investments are illiquid, growth assets and there are barriers to UK pension schemes investing in these assets.
- Many DB schemes are de-risking and aiming to hold more liquid, less risky, matching assets. This lack of appetite for holding illiquid, growth assets tends to be exacerbated for DB schemes that are planning to go to an insurer in the short to medium term.
- For DC schemes, there are barriers around both cost and complexity, given the competitive pressures to reduce charges for members and the pricing and liquidity requirements for DC savers.
- We believe that regulatory changes could help to address these barriers and hence increase the amount of funding provided by pension schemes for climate solutions.
What outcomes are we hoping to see?
- More money allocated to climate solutions to aid the net zero transition.
Related insights
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What does this mean in practice?
- Almost all countries have signed up to the goal to limit temperature rises to 1.5°C, which is necessary to avoid severe physical climate risks.
- However, the UN’s 2023 Emissions Gap Report found that the world is heading for a temperature rise far above 1.5°C under the trajectory set by governments’ current policies. This means that current policies are insufficient to meet international climate commitments.
- In addition to this, the actual actions being undertaken by many countries and governments are not expected to be enough to successfully implement policies that they have in place. For example, in May 2024, the High Court ruled that the UK government’s climate strategy was not fit-for-purpose, and breached the UK Climate Change Act.
- We believe it is important to call out this disconnect between high-level commitments and actions on the ground.
What outcomes are we hoping to see?
- More understanding and acknowledgement from policymakers of the need for urgent and ambitious action.
- Actions being consistently undertaken in line with the commitments agreed, with no backsliding.
- The Power Market Outlook 2023: Is GB on track to meet net zero power?
- Gilts, stewardship and addressing climate risk
- UK investors with at least £184bn under management support policy action to meet scale of climate challenge outlined in latest UN report
- Investment community must address climate change as a systemic financial risk amid rising market uncertainty
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What does this mean in practice?
- Investors need a clear, credible and stable policy environment to give them comfort that government policy is aligned with them investing in a way that supports the net zero transition. This should include detail on the policies to enable each sector of the economy to transition.
- It is important that climate policies are positive for nature and people, to avoid unintended consequences and societal backlash.
- In recent years the UK government’s net zero policies have been criticised for not being credible. For example, ClientEarth has twice successfully taken the UK government to court, with the High Court ruling that the UK government’s climate strategy is not fit-for-purpose, and therefore breaches the UK Climate Change Act.
- We have also seen instability in specific policy areas, such as changes around the phase out of petrol and diesel cars and fossil fuel boilers.
What outcomes are we hoping to see?
- A clear, consistent and stable net zero policy environment for investors.
- A suite of credible policies for each sector that are sufficient to support alignment with net zero pathways.
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What does this mean in practice?
- In our experience, trustees often feel inhibited from taking greater account of climate change in their investment decisions because they are unclear over the extent to which this is compatible with their fiduciary duty.
- We also see a range of views within the legal profession about the extent to which trustees can take account of climate change under the current rules of fiduciary duty.
- We see that schemes with shorter-term time horizons, such as closed DB pension schemes planning to buy out with an insurer, often take a shorter-term view of the relevance of climate risks to their members’ benefits and make decisions based on the expected lifetime of their scheme (ie until buy-out) rather than the time horizon over which members’ benefits are paid (ie the rest of their lifetimes).
- Current regulations and guidance encourage trustees to consider climate risks to their scheme (a micro or outside-in perspective). We believe trustees should also be encouraged to manage the real-world impacts of their investments (a macro or inside-out perspective) and hence their contribution to the risks. This is known as a ”double materiality” perspective.
- We are not expressing a view on the legal mechanism to achieve a reinterpretation of fiduciary duty. However, we do believe that clarification of fiduciary duty would be helpful, provided it enables trustees to take account of long-term time horizons and macro considerations.
- Our ask is partly addressed by the recent Financial Markets Law Committee paper on fiduciary duty, but we believe it needs to go further in some areas, and should be endorsed by the DWP and TPR.
What outcomes are we hoping to see?
- Fiduciary duty is clarified by the DWP in the way outlined here.
- All trustees know they can address climate change on a systemic level.
- Trustees consider the long-term implications of their investment decisions for members, even when these extend beyond the expected life of the scheme.
Related insights
- Responsible investment - My lightbulb moment
- LawDebenture: 2024’s LawDeb Pensions Debate delivers on the topic of sustainability
- Fiduciary duty and climate change: Input to the Work and Pensions Committee’s evidence session on 21 February 2024
- A quarter of trustees think fiduciary duty shift will help tackle climate risks
How will we use our climate policy asks?
Our five policy asks have been designed to be straightforward and cover different actions of climate action we feel is needed. You can find more information on the asks by clicking on each one above. Please note that asset owners' support relates to the headline asks, and not necessarily the supplementary information that follows.
We are taking various actions in support of the asks, including:
- Raising them in our discussions with DWP, the Pensions Regulator and others.
- Undertaking collaborative policy work that seeks to secure policy change, including through the Investment Consultants Sustainable Working Group (ICSWG) for which our Head of Responsible Investment leads the policy-related workstream.
- Responding to relevant consultations from the UK government and regulators.
- Publishing thought pieces and providing press comments.
We will continue and strengthen our activities in support of each ask, including encouraging others (eg investment managers, industry working groups) to adopt consistent positions.
We recognise that many of these policy asks require a range of parties to act. Our actions are likely to be only a small part of what’s needed to achieve change, but we believe they can make a difference.
Why should pension schemes take action?
The pensions world is one of the few areas that bring together all these different parts of society – we represent trillions of pounds of assets, we serve tens of millions of individuals who are pension scheme members, and we invest in thousands of companies.
Because of this, LCP believes that pension schemes have the power to make a huge difference – and we also believe pension schemes have the responsibility to do this. Pension scheme members are going to be impacted by climate change, and their financial position in retirement will depend on how climate change is addressed.
Systemic stewardship
The term ‘systemic stewardship’ describes actions that are taken by investors to influence the outcomes for a whole system, with the objective of addressing systemic risks that have the potential to materially harm financial outcomes. This can include engaging with policymakers and regulators to change the rules and incentives that shape the actions that companies and investors take.
To address climate change, 'systemic stewardship' is crucial.
