
Aligning to a net zero pathway: Top tips for pension scheme trustees
This report provides practical insights for pension scheme trustees in aligning their investments with a net zero pathway. The guide’s tips are broadly applicable to pension funds across the globe. It defines “net zero,” the challenges and opportunities facing trustees, and the importance of stakeholder engagement in crafting a successful transition.
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OVERVIEW
This report is a practical guide aimed at pension scheme trustees, to help them align their investments with a ‘net zero’ target. Net zero means avoiding any net greenhouse gas (GHG) emissions in both pensions and business operations. The report highlighted the importance of stakeholder engagement in planning a transition strategy that will be impactful.
The report begins by defining “net zero” and then highlights the main challenges and opportunities trustees should consider when planning a net-zero transition strategy. Through feedback from chairs and trustees who have undertaken a similar journey, the report offers some tips that will help trustees to establish their objectives, milestones, and embed these into their established processes. This guide serves to demonstrate the compatibility of transitioning to a net zero pension scheme with the upholding of fiduciary duty.
The main ESG issues discussed in this report relate to climate change. The report suggests that a net-zero transition is key to mitigating climate risk, safeguarding investments from potential economic shocks as well as capitalizing on investment opportunities created by the global transition to net-zero economies. Acknowledging climate change in the risk register is likely to rank high for schemes, making it an important part of due diligence.
There are several recommendations to help align a pension fund with net zero aspirations. Chairs and trustees should identify and define their objectives, frame their approach by building an evidence base through research articles, proprietary data, or peer experiences. Identify measurable criteria to monitor progress by embedding objectives and milestones into existing processes. Finally, it is crucial that a compelling narrative is created, which outlines the plan fully with clear boards’ goals and ambitions. The report cautions that the success of net-zero alignment could lead trustees to confront some difficult or controversial decisions.
The report highlights the importance of measurement and reporting, obtaining support from external experts and stakeholders to scrutinise performance. Leveraging industry frameworks offer best practices, advice and helps trustees to connect to many shared initiatives and industry groups.
Engaging investee companies, demonstrating member views at company AGM voting and prioritizing communications where and how best to deploy strategies are other recommendations to align a scheme towards net-zero targets. Alecta uses climate stress testing as a framework to monitor progress, looking holistically across the value chain. Industry-wide collaborative opportunities and frameworks are available for trustees, one of which is the A4S’ Pension Scheme ESG Maturity Map. This map offers recommendations to help trustees align their activities with their net-zero strategy. Trustees are urged to have open communication with members, understand their views and preferences.
Pension schemes should consider stakeholders, including service providers, peers, and members to ensure they achieve consensus. The report suggests that by leveraging sponsor resources to measure and monitor progress, a joined-up approach is created, offering a way to transition with minimal friction. Collaboration with internal teams in the form of a working group comprising sustainability, risk, and investment specialists from the scheme and its sponsor can help provide a dedicated space, time and efforts in delivering net-zero plans are managed.