As significant gilt holders, pension schemes can play a key role in addressing climate risk – LCP

LCP is urging Liability Driven Investment (LDI) managers to influence government climate policy to protect members’ pensions, as gilts play an increasingly large role in DB portfolios.   

Climate change cannot be addressed by investors and companies alone. Government action is also needed.

LCP believes LDI managers – as major investors in UK government debt – should engage with the UK government about addressing climate risk. Defined benefit pension schemes, which often have large allocations to LDI, therefore, have a key role to play.

LCP believes that trustees should encourage their managers to articulate a transparent view of what they want to see from climate policy and develop a more robust approach to climate policy engagement.

In an assessment of 5 major LDI managers, LCP found that there is more they can be doing in these areas. In the analysis, LCP found:

• All five firms are liaising with a range of UK government and regulatory bodies on climate policy, and have dedicated resources in this area - albeit to varying degrees.
• LDI managers’ strategies and governance frameworks relating to climate policy engagement currently tend to be quite rudimentary and not clearly disclosed publicly.
• Generally, the managers have been reluctant to comment on governments’ net zero plans as they are unwilling to be seen to be taking a “political side”. However, asset managers have a fiduciary duty to serve their clients’ best interests, which includes mitigating risks that they are exposed to, such as climate change. LCP believes that conducting an analytical assessment of government policies to reduce emissions is in line with this duty. 

Julian Thakar, Consultant at LCP, commented: “There has traditionally been a misconception that gilt stewardship is not possible. However, it has the potential to play a significant role in addressing the systemic risks that our clients are exposed to, including climate change.

It’s really important that schemes with LDI mandates engage with their managers to encourage improvements in their climate policy engagement in the areas we have identified.”