How Can UK Pension Funds Invest Responsibly to Promote Sustainable Development?

In the modern financial landscape, the concept of responsible investment has gained significant traction. As we collectively strive to create a healthier planet, there’s a growing interest in how UK pension funds can contribute by investing responsibly to promote sustainable development. This article delves into the practical steps and available schemes that will enable pension funds to make informed and sustainable investment choices.

Understanding ESG & Its Importance in Pension Fund Investment

Environmental, Social, and Governance (ESG) factors have emerged as integral elements in the assessment of investment risks and opportunities. They provide a framework for considering the potential impact of a company’s operations on the environment and society, as well as evaluating the quality of its governance.

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Pension schemes are increasingly integrating ESG considerations into their investment decision-making processes. It’s not just about ethical considerations; there’s a business case too. Taking account of ESG factors can help pension schemes to identify companies that are better managed, more resilient, and better positioned for long-term success.

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Responsible investment means more than just divesting from companies with poor ESG performance. It includes proactive strategies like positive screening, which involves selecting investments that contribute positively to ESG factors, and active ownership, which involves using shareholder power to influence corporate behavior.

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Embracing Stewardship & Active Engagement

Stewardship refers to the responsible management of investments that are owned by others. In the context of pension funds, this means taking an active role in the governance of the companies in which they invest.

Active engagement involves communicating with companies on ESG matters, voting on shareholder resolutions, and collaborating with other investors to promote better business practices. It’s a way for pension schemes to influence companies to improve their ESG performance, thereby reducing investment risk and potentially enhancing returns.

A robust stewardship strategy requires resources, expertise, and commitment. However, it’s worth noting that the UK Stewardship Code 2020 has raised the bar for what is expected of investors, including pension schemes. This makes active engagement not just an option, but a necessity for responsible investment.

Utilising Climate Change Reports

Climate change poses a significant long-term risk to the performance of investments. As such, it’s crucial for pension funds to consider the climate change impact of their investments. One way to do this is by utilising climate change reports.

These reports, often available as PDFs, provide information about the carbon footprint of a company or an investment portfolio. They can also provide insights into a company’s strategy for managing climate-related risks and opportunities. This information can help pension schemes to assess the sustainability of their investments.

Moreover, climate change reports can provide a basis for engagement. Pension schemes can use the information in these reports to start conversations with companies about their climate change strategies, and to push for improved disclosure and action where necessary.

Incorporating ESG into Pension Fund Governance

Pension fund governance refers to the systems and processes in place to ensure that the fund is managed in the best interests of its beneficiaries. Incorporating ESG into pension fund governance means ensuring that ESG considerations are fully integrated into these systems and processes.

This can involve, for example, incorporating ESG considerations into the fund’s investment beliefs, integrating ESG factors into risk management processes, and ensuring that there is sufficient ESG expertise among trustees and investment staff.

Incorporating ESG into pension fund governance also means being transparent and accountable to beneficiaries about ESG issues. This can involve providing regular ESG updates to beneficiaries, including information about the ESG performance of the fund’s investments, and the fund’s engagement activities.

Conclusion

There is no one-size-fits-all approach to responsible investment. What works for one pension scheme may not work for another. Each pension scheme will need to develop its own approach, based on its unique circumstances and the needs and interests of its beneficiaries.

However, one thing is clear: responsible investment is no longer an optional extra for pension schemes. It’s an essential part of ensuring the long-term sustainability of investments and the delivery of secure and sustainable pensions for beneficiaries.

Leveraging LGPS Central and PRI Association

A key turning point in the journey of responsible investment for UK pension funds has been the role of LGPS Central and PRI Association. Both institutions provide essential tools and guidance to help pension schemes incorporate sustainable investment practices.

The Local Government Pension Scheme (LGPS) Central Limited is a fund management company, owned by and managing the pooled assets of eight Midlands-based local government pension funds. LGPS Central has been at the forefront of promoting responsible investment by integrating ESG considerations into its investment decision-making processes. It has also been instrumental in providing a framework for pension funds to assess their climate change impact and develop a holistic sustainability strategy.

On the other hand, the Principles for Responsible Investment (PRI) Association is an international network of investors committed to integrating ESG factors into their investment practices. The PRI Association provides resources such as the ESG Impact Report and Quarterly Stewardship Report, offering pension schemes insights into the latest trends and best practices in responsible investment. Additionally, the association provides a platform for pension schemes to engage with companies on ESG matters, promoting active stewardship and long-term sustainability.

By leveraging the resources provided by LGPS Central and the PRI Association, pension schemes can make informed decisions that promote sustainable development.

The Role of the UK Stewardship Code in Responsible Investment

The UK Stewardship Code 2020 has significantly influenced the shift towards sustainable investment among UK pension funds. The code sets high stewardship standards for asset owners and managers, promoting transparency and accountability in the investment process. This has not only increased the focus on long-term value creation but has also amplified the attention towards ESG incorporation.

The code encourages active engagement by investors and stresses the importance of environmental and social governance. It mandates investors to disclose how they have discharged their stewardship responsibilities, thus promoting transparency in the investment process. Pension funds are required to publish an annual stewardship report detailing the alignment of their strategies with the code’s principles.

The UK Stewardship Code 2020 has thus made responsible investment not just an option, but a necessity for pension schemes seeking to promote sustainable development.

Conclusion

Responsible investing is increasingly becoming the norm for UK pension funds. By integrating ESG considerations, embracing active stewardship, utilising climate change reports, incorporating ESG into pension fund governance and leveraging the resources of LGPS Central and PRI Association, pension schemes can make a significant contribution to sustainable development.

However, each pension fund is unique and will need to develop a bespoke approach to responsible investment. The UK Stewardship Code and the resources provided by LGPS Central and the PRI Association provide a robust framework for pension schemes to navigate this landscape.

Ultimately, responsible investment is not just about driving sustainable development; it’s about securing the long-term financial wellbeing of pension scheme beneficiaries. Through responsible investment, pension schemes can ensure the long-term sustainability of investments and deliver secure and sustainable pensions for beneficiaries.