Pension schemes totalling £84 billion back LCP's call for policy changes to combat climate change

LCP is urging regulators and policymakers to address the systemic financial risks from climate change through its five policy asks. These asks have already received endorsement from 35 pension schemes with assets totalling £84 billion^[i].

With the devastating impacts of climate change already happening, and the world not on track to limit temperature rises to 1.5°C, LCP believes that 'systemic stewardship' is a crucial path to achieving the scale of changes that are needed. Systemic stewardship is a tool investors can use to address systemic risks – these are risks that affect a whole system (such as financial markets) rather than just impacting one company or holding within an investment portfolio, and have the potential to materially harm financial outcomes. Instead of seeking to influence one company at a time, systemic stewardship involves actions such as engaging with policymakers and regulators to change the rules, practices and incentives of financial markets as a whole.

Achieving net zero emissions by 2050 is more than just a target; it has real implications for the world we live in, the financial stability of our markets, and current and future pension pots. It is a hugely challenging target and can only be met by huge collaborative action.

At LCP, we want to use our influence to drive forward the best possible climate outcomes for our clients and the pension scheme members we ultimately serve. But we also know that our voice is so much more powerful when we have the voices of others behind us, which is why we’ve invited our pension trustee clients to support the following policy asks.

Our five climate policy asks^[ii]

1. Climate regulations for investors should aim for real-world impact, not just disclosures.

We want pension trustees to focus on managing their scheme’s assets in ways that reduce climate risks to those assets and contribute to a more sustainable financial system, ultimately leading to better outcomes for members. We would like to see reporting used as a tool to facilitate that, rather than it being the main focus of regulatory requirements.

2. It should be easier for DB and DC pension schemes to invest in climate solutions, including growth and/or illiquid assets.

Substantial investment is required in climate solutions such as renewable energy to successfully transition to a net-zero economy. Many of these investments are illiquid growth assets, posing challenges for UK pension schemes, both DB and DC, to invest in them. We believe that regulatory changes could help overcome these barriers, thereby increasing the funding available from pension schemes for climate solutions.

3. Climate action needs to match the scale of the risk, removing the current disconnect between the levels of policy ambition and implementation.

There is a disconnect between high-level climate commitments and real-world actions. Policymakers must urgently acknowledge and act on the need for ambitious, consistent measures to meet climate goals without regressing.

4. Governments should set clear, credible, consistent net zero plans which are nature-friendly and socially-just so investors can invest in the net zero transition with confidence.

Investors need a clear, credible, and stable policy environment to give them confidence to invest in a way that supports the net zero transition. This should include details on the policies to enable each sector of the economy to transition. It is also essential that climate policies are positive for nature and people to avoid unintended consequences and societal backlash.

5. Pension trustees’ fiduciary duty should be reinterpreted to have a longer time horizon and include macro (impact) as well as micro (risk) considerations

Trustees often feel hesitant to take greater account of climate change in their investment decisions because they are unclear on how this aligns with their fiduciary duty. Current regulations and guidance encourage trustees to take into account climate risks to their scheme (a micro or outside-in perspective). We believe trustees should also be encouraged to address the real-world impacts of their investments (an inside-out perspective) and, therefore, their contribution to the risks.

Commenting on the policy asks, Claire Jones, Head of Responsible Investment at LCP said: “Climate change cannot be tackled by investors or companies acting in isolation; it demands extensive collective efforts. It requires the alignment of pension schemes, policymakers, businesses, and investors in concerted action.

“Policy change is essential for tackling climate change. We are reassured by the new government’s recognition that the “climate and nature crisis is the greatest long-term global challenge that we face” and its mission to “make Britain a clean energy superpower”^[iii].

“It’s great that many of our pension clients are already supporting our policy asks - we are keen to take their collective voice, to work with policymakers and regulators to deliver the changes that are needed to reduce systemic climate risk to the financial system and the pension scheme members that our clients serve.”

Laasya Shekaran, Senior Investment Consultant at LCP added: “These policy asks are critical. Climate change poses a significant financial risk that demands immediate action. Today’s decisions will shape our future in 2030, 2050 and beyond, affecting everyone, including pension holders.

“To combat the devastating effects of climate change, we must align global efforts to limit warming to 1.5°C above pre-industrial levels. Current policies worldwide fall short of this goal, risking increased natural disasters, habitat loss, and social upheaval. Continued inaction could lead to severe financial repercussions, potentially destabilising economies and global financial systems.”

More information about the policy asks, and how pension trustees can support them, can be found here.