Stuart O’Brien: Sustainably-invested pensions are firmly in the spotlight

As we all try to move towards a greener lifestyle, the environmental credentials of our pensions are increasingly under the spotlight. In part this is due to employees taking a greater interest in how their pensions are invested. But there is also a growing recognition that a more sustainably invested pension is also likely to be a more financially robust one: climate-related risks affect not just the world we live in, but also the companies our pensions are invested in.

The ability of employers to provide sustainable pensions for their employees will depend very much on the way their pensions are provided. Employers that enrol their staff in contract-based arrangements will need to look at the product they have selected for their employees and consider whether it remains fit for purpose, focusing in particular on how the default fund is invested. In many cases these will have been set up a number of years ago to track an index which will take no account of climate-related risks in their investment approach. There are now many alternatives, including funds which track new climate-friendly indices and employers should look at whether moving to one of these may be more suitable.

For employers with their own trust-based pension arrangements, their trustees are likely already considering environmental, social and governance (ESG) factors in the scheme’s investment strategy following a number of recent legislative changes. Trustees of very large schemes will also have to start publicly reporting their climate-related credentials from October this year.

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Employers should discuss the approach being taken with their trustees and ensure that, at a minimum, climate-related issues are being properly taken into account as a financial concern. But some employers and trustees may wish to go further, with many now setting targets for transition to a net-zero investment strategy over the coming decades. There are many aspects to consider with such an approach, including reconciling it with the best financial interests of the scheme’s members, but for many trustees a strong steer from the scheme’s employer can provide the impetus for real change.

Stuart O’Brien is a partner at Sackers