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World Earth Day | Insights | Quantum Advisory

World Earth Day

Introduction

Earth Day is an annual event that takes place each year to demonstrate support for environmental protection. 

The Earth Day Organisation states that “We need to act (boldy), innovate (broadly) and implement (equitably). Business, governments and citizens – everyone accounted for and everyone accountable. A partnership for the planet”. At Quantum, we believe that consultants and pension scheme trustees play an important role in supporting solutions that move towards a cleaner, greener environment.

Environmental risks

In our role as consultants we are proud to work with a diverse range of clients, whose main priority is the same – which is to ensure that schemes are run well and member benefits are paid as they fall due. From research undertaken by various external organisations, it is becoming clearer that failing to consider environmental risks in scheme portfolios could impact the value of assets in the future and hinder trustee boards’ abilities to meet their objectives. Environmental risks include:

Environmental risks include:

  • Physical risks: financial losses as a result of floods, droughts, wildfires, loss of biodiversity and rising sea levels. Transition risks: financial losses from failures to adapt to policy changes and ownership of stranded assets.
  • These risks can potentially impact the value of scheme assets and also the strength of a sponsor’s covenant. The protection of the environment is important for all stakeholders involved. Trustees should therefore be considering these risks when setting and reviewing their investment strategy.

What can trustees do to help improve impact and reduce risk?

Pension schemes and trustees are able to directly influence environmental protection by facilitating investment into cleaner technologies or by using their voice (voting rights) to influence company behaviours.

Trustees often delegate full discretion concerning the stewardship of their investments to their asset managers. However, recent guidance from the Department for Work and Pensions encourages trustees to either set their own voting policy or, if they have not set their own policy, to explain in the Statement of Investment Principles how they will monitor their asset manager’s voting policy. Going a step further than this, the guidance suggests that trustees should agree on their stewardship priorities or themes – environmental protection being a potential option.

Stronger actions include divesting from companies that don’t align with environmental protection. The merits of divesting is hotly debated within the industry. Some say that that divesting may reduce risk in portfolios as it reduces the transition risks (mentioned previously). On the contrary, some argue that divestment means you lose influence over companies to help them change and instead that engagement/monitoring of companies will create the most impact – a position supported by the Department for Work and Pensions.

From our perspective, the divestment approach alone may not solve all environmental challenges, however divestment should be considered within the broader landscape of environmental impact. Ultimately, it boils down to trustees’ beliefs on the topic, essentially focusing on weighing up beliefs and moral judgements against expected investment returns and risk. There is no one solution for all.

What assets might be best suited?

Private market investments, including infrastructure equity or debt, can be an effective way for pension schemes to gain exposure to long-term environmental themes such as climate change adaption, mitigation, natural capital and biodiversity.  Specifically, assets focused on renewable energy, waste transfer and efficient transportation.  Barriers to entry have been an issue in the past, particularly legal complexity and fees, but these are slowly but surely being addressed and more trustees are beginning to see the long-term benefits of such investments.


How can Quantum help?

The plethora of Environmental, Social and Governance (“ESG”) related acronyms and terminology is growing and we understand that keeping on top of ever expanding regulatory requirements is difficult. But fear not, we are here to help. At Quantum, we can help trustees understand, develop and document their investment beliefs, including ESG and climate, through initial training on the topic and facilitation of discussion. Through our constant dialogue with asset managers we are well positioned in the market to stay on top of new fund launches and general trends within the ESG space, and to help avoid so called ‘greenwashing’.

 

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