Key takeaways
- Reaching net zero by 2050 is arguably the most ambitious endeavour the pensions industry has ever undertaken
- The journey has prompted deep questions about purpose and the nature of fiduciary duty among pension funds, with some broadening their definition of purpose to encompass shareholder value, ESG considerations, and employee experience
- The discussion on universal ownership has been re-awoken by the net zero issue.
Climate change is one of the biggest systemic risks pension funds and other institutional investors are facing. Over two thirds of the Thinking Ahead Institute peer group from the Global Asset Owner Peer Study on best practices have committed to a target or set ambitions to reach net zero by 2050.
“For those who have committed, it is arguably the most ambitious commitment the industry has ever undertaken”, said Andrea Caloisi, Associate Director at the Thinking Ahead Institute.
The commitments represent a huge change in a short space of time. They have prompted much rethinking and reframing of long-held wisdom within the pension fund community.
Aligning net zero with fiduciary duty
One big shift that the net zero journey has prompted is a widening definition of purpose among pension funds. The Thinking Ahead Institute is witnessing a shift towards a more nuanced vision, where purpose encompasses not just scheme members’ financial interests, but also shareholder value, environmental, social and governance considerations, and employee experience.
A poll of 42 pension scheme decision-makers at a recent Thinking Ahead Institute event in London showed that 63 percent felt that ‘net zero can be an asset owner’s ambition but it cannot commit to it without fiduciary duty challenges’.
As an industry (we) have been too beholden to figures, and at times, narrative may be more relevant than numbers.
Roger Urwin, Co-founder, Thinking Ahead Institute
This shift is prompting a review of the traditional definition of fiduciary duty in many areas of the world. “The Financial Markets Law Committee gave a narrative on this,” said Roger Urwin. “One of the things they suggested is that we as an industry have been too beholden to figures, and at times, narrative may be more relevant than numbers.”
Scheme fiduciaries’ views on this differ, with 62 percent of attendees at the recent Institute event believing that net zero commitments pose challenges to fiduciary duty. However, an increasing number are questioning the point of maximising investment returns without taking into account the fuller context of the world into which savers will retire.
This realisation has prompted the Thinking Ahead Institute to add a third dimension to the well-known risk/return framework: real world impact.
The path to net zero
Speaking at the recent Thinking Ahead Institute event, one pension scheme observed a herd mentality around the net zero target and asked if there is a benefit to achieving it earlier or later.
“It really is a tough one,” observed Urwin. “Any fund in this room has to be prepared to be a leader and a follower. You can’t commit to just one strategy. There are so many uncertainties on the pathway.”
Urwin added: “A phrase the investment industry hasn’t grown up with is the theory of change. You have to visualise how your strategy works along with other like-minded investors who are doing net zero investing. But it has to be keyed off how the real economy progresses. It is important to remember that sovereign wealth funds are takers of climate change, but they can contribute as makers as well. If you are too far ahead of the game, the leading edge becomes the bleeding edge.”
Net zero and universal ownership
Universal owners are institutional asset owners that own such a representative slice of the economy that they find it impossible to diversify away from systemic risk. Over half – 65 percent – of Thinking Ahead Institute peers consider themselves to be universal owners.
We can’t create the climate of the future, but we can contribute to the climate of the future. That is universal ownership in a nutshell.
Roger Urwin, Co-founder, Thinking Ahead Institute
The discussion on universal ownership has been re-awoken by the net zero issue. As universal owners, pension schemes must reflect on their responsibilities to the world around them. Roger Urwin observed: “When it comes to earth systems, we have to do something progressive. How can the finance sector be a contributor to thinking deeply about that? We can’t create the climate of the future, but we can contribute to the climate of the future. That is universal ownership in a nutshell.”
Urwin added: “The debate on universal ownership has just awoken and been spliced together with the net zero issue. Universal ownership and net zero go together and reinforce each other. Universal ownership strategies are solid granite finance. They are strategies that work better than the alternative. They are plug and play strategies – you can do them in addition to what you are already doing.”
What became clear from the Thinking Ahead Institute’s gathering in London is how seriously pension funds take their roles as universal owners. The net zero transition serves as a reminder of how quickly the world can change. The owners in the room are committed not just to reaching their 2050 goals. They are continually readying themselves to meet the next, unknown seismic challenges – whatever they look like.
This is the third of three articles compiled from insights from the Thinking Ahead Institute events, Exchange+: TAI & Future Fund Global Asset Owner Peer Study symposium and summit on beliefs and best practices.