Pensions are a huge part of the debate on sustainability and climate.  If there’s one thing you want from your pension, you want it to be sustainable. And pension fund managers are long-term, big investors, with a huge part to play in navigating climate change and the road to a sustainable planet.

We caught up on a conversation between Ralph Benson, head of financial advice at online financial advisor, and Jerry Moriarty, chief executive of the Irish Association of Pension Funds, and chair of the Sustainable & Responsible Investment Forum Ireland.

This article is an edited extract of a webinar on consolidating your pension held as part of PAW21.

Ralph Benson Moneycube

Ralph Benson, What does sustainability mean to you in the context of pensions?

Jerry Moriarty, IAPF: The reason sustainability is so important for pensions is that pension investors are long term investors. They’re also really big investors, if you look across Europe, I think is about €2 trillion of pension fund investments across Europe. So you know, they’ve got a significant say in how assets are allocated. They own sizable chunks of big companies so they can sort of drive behaviour. Because they are long-term investors, they really do have an important stake and what companies are going to do over the long term and how those investments going to perform over the long term.

Pension funds will say that their primary role is to get investment return for their members so that they can pay out the benefits that are due. But there is no point in getting really good returns this year and next year if the company is going to disappear in 10 or 15 years because of what’s happening in the environment, or some of the other factors on social or governance side.

It is important that pension funds are sustainable, responsible investors. And it’s very much on the agenda over the last few years, driven by lots of things. 

There’s a lot happening around climate and there’s much greater awareness about it, but it’s also a lot of regulatory pressure coming on as well. Regulators are looking at it from a risk management perspective. So you see, some of the European countries and a lot in the UK at the moment as well where bigger pension funds are going to have to look at what their carbon risk is, what their climate risk is. It goes beyond just reporting on doing some sustainable investments, and really drilling into the detail.

RB: Yeah, there’s definitely a sense of more scrutiny, not just around climate, but generally speaking around sustainability – if you look at the Deliveroo float, so like the UK’s biggest fund house, Legal & General, walked away from that float, for what you could call sustainable reasons concerning work practices.  It’s probably the highest profile example I can see where money didn’t want to go into that float, which was in some ways a disaster for the City anyway. It was driven by the sustainability concern effectively. 

Now, as you say, with government backing to do the “right thing’, there’s a link between risk around sustainability but also increased return if you’re if you’re going the right direction from how government policy is directing things.

JM: Yeah, absolutely. I do think you’re seeing more of that type of engagement from fund managers. And you’re seeing collaboration between managers as well. They’re taking stances that, you know, they’re getting other managers involved in. They might have one or 2% of the company, but if they get other managers with one or 2%, suddenly you’re talking about a sizeable group of shareholders who can change behaviour or take action.

And that’s one of the debates that constantly goes on: do you stay invested in the company to try and see change through, or do you walk away if you just think that it’s not going to change

RB: So then the question is, we can all invest in really green stuff. But somebody’s going to pick up those shares, be it tobacco or oil and gas or whatever it is. It’s not going away overnight.

So bringing that back to an Irish context, I think there’s two sides to this.  One is corporate pensions in Ireland, where typically choice of funds is quite limited. You might have three choices to choose from. How is that evolving? I have a sense that we’ve been a little bit slower than we should be in Ireland. Are you seeing sustainable investment options being introduced within corporate selections?

JM: I think you’re right. We probably have been slower. I think there are good reasons for that. Our pension funds tend to be quite small by international standards.  Our largest entrepreneurs, probably €4-5 billion, they mostly invest in pooled funds. They don’t actually directly invest. If you look at the UK, you know, the bigger pension funds have assets of tens of billions of pounds, and they tend to have more direct investments. So they actually have a greater say.  If you go to somewhere like the Dutch market the largest pension fund is €400 billion or so. The scale makes a big difference.

There are different ways to approach it.  You can have funds for pension members that make an impact or are socially responsible funds, or you can ensure that the main fund offering has responsible investments driven all the way through it.

A lot more asset managers are incorporating it into their mainstream investments and not looking at just having a special fund, which ticks a box.

If the manager is making sure that the companies that are in the fund have responsible policies, you can tilt funds towards that.

Then you can have very specialist funds. Some employees do that, particularly those with a very engaged very young workforce where those types of issues are very important to them. And so they do make those sorts of choices available.

But I think most people are making sure that their mainstream funds to have that responsible investment approach running through the fund.

RB: That is probably the ideal way to do it in terms of adoption and sustainability into pensions, because it becomes an opt-out thing as opposed to having to go specifically and seek out climate-friendly investment policies for your pension.

JM: Ultimately, that’s where it will end up anyway.  Applying ESG factors will become no different to forming views on a sector or a currency or a region of the world. And that’s what the best managers do all the time. ESG is obviously relatively new and it’s quite a hot topic, but I think ultimately, it’ll just become part of that mainstream investment process.

RB: Right – climate risk becomes one more investment management risk factor to consider.

JM: That’s a useful way of looking at it in terms of the question, why should we invest in something just because it’s good for the world or it’s good for the planet? Because again, you’re back to this question of ‘my job is to get return from our members, make sure the benefits get paid’.  But I think if you approach it from that risk management perspective of, what is this investment going to do in ten or 20 years, how is it going to be impacted by climate, by carbon taxes, by social factors, by governance issues, then you’re looking at this as an investment issue rather than a do-good issue.

Pension trustees can be very sceptical of ethical investing because it’s very subjective. So it helps when people look at it from a different lens, from the risk side. 

RB: There’s also a huge opportunity here as well. We’re on the cusp of a massive energy transition. There is going to be a whole economy around driving down carbon, energy efficiency and so on.  How do you see that carbon transition featuring within pension funds.

JM: Again, they’re different ways of looking at it. If you’re just investing in a company and studying what that company does, how it’s going to be impacted, how they’re prepared for it. Is this something it’s going to cost a lot? Is it priced in? A lot of climate risk isn’t yet priced in because people haven’t really thought it through.

But then you’re also going to have lots of companies who are going to be driving that change. So, do you look at solar and wind power which has become very big, and companies that are doing that are supplying parts? Do you look at things like electric vehicles, which are clearly part of everybody’s solution, but still quite small, but there’s huge potential for growth. So trying to find a company that’s going to be leading that growth is something fund managers do. And once you’ve got that vision for the future, and you see how investee companies fit in, then there are some really good opportunities there in terms of getting a return.

RB: There are certainly funds out there that are looking at medium-sized businesses which are very focused on, say, very specific aspects of energy efficiency.  But actually a lot of this can be understanding the strategy of big industrial companies.  A company like Schneider Electric, the French engineering conglomerate, for example, has a lot to say on sustainability and climate.  But on another analysis, it is an absolutely conventional core holding of a European equity portfolio. So it’s about getting under the bonnet of the strategies of existing business powerhouses because they haven’t gone away, and they will still be the bulk of most of our portfolios.

JM: Another great example is the oil companies. Obviously, they are going to have to transition and some have taken it on board much earlier than others. So again, it’s understanding which ones ultimately will be winners and losers. And that’s what investing is all about, trying to pick winners and avoid losers. So having people to properly understand and continue the analysis and research to understand where those winners or losers are likely to be is really important.

RB: We’ve talk about how climate considerations are coming into corporate pensions. Turning to people who are taking decisions directly as single member pension holders, how do you think they should be thinking about climate within their pension?

JM: It’s harder because they’re not going to be spending the same amount of time on it. It’s probably back to understanding, if this is an important issue for you.  That might be because you’re concerned about the impact, or expect it will become an important issue, or simply from the investment return perspective. I think a good starting point is talking with your advisor about what each manager does. Obviously, it’s a very noisy space as well. Because it’s such a hot topic, everybody says it’s always been embedded in their process. So advisors try and get through some of that noise and figure out who’s actually doing it well.

There are basic questions, like do the managers vote at AGMs, do they take stances that can be an indicator? Most managers are signed up to things like the UN PRI.  They actually have to submit reports on what they’re doing. So they’re all freely available and, you can get a good sense whether it is something they’re really doing.

RB: I’d be interested to just explore a bit more that some of what you’re doing as part of SIF Ireland.  Maybe just tell us a few words about what happens behind those closed doors?

JM: Our role is to raise awareness, keep climate and sustainability on the agenda, in terms of best practice. The last few years, we’ve published the State of Play report, which was just looking at where responsible investment ESG fits in, in the Irish market. One of the recommendations of last year’s report was there should actually be a sort of roadmap for how Ireland deals with sustainable finance.

The skills part is quite important as well. So it’s trying to skill up people, so that the people who are taking fund management decisions understand ESG issues.

RB: The other thing that’s nice about climate and pensions is that normally, it’s difficult to get people interested in pensions.  It’s a word that makes people switch off. But people do want to talk about this side of the pension world.

JM: I think this is a really good way of getting the people engaged. I think it is something particularly where people do care about, they do worry about it. There’s a really good company in the UK called Make My Money Matter which is headed up by Richard Curtis (who directed Four Weddings and a Funeral). But one of the things they did was they went out on the street and they basically showed people a list of the types of investments pension schemes, and you know, people were horrified, investing in arms manufacturers or things like that.

And one of the really telling points was they gave them a list of things that they could invest in like solar power and the energy transition. And quite a few people said, ‘if I thought my pension funds was investing into that, I’d pay more in’. 

So it’s making that link between how that can matter. It is a really good way of getting people involved and getting people interested.

RB: One of the big things I’m taking away is that we’re well underway on this journey in terms of thinking about the impact of our pensions on climate. Pensions are amount of that capital and have a big part to play in the energy transition. If you look forward five years or so, hopefully we’ll be in a position where rather than it being a specific thing that you have to go out and look for.  Instead positive impact on the climate will be embedded within the mainstream fund, and if you want to go and get some sin stocks, you’ll have to do that by exception and opt into those rather than currently, where we’re probably the other way around.

On top of that, for individuals setting up their pensions, there are definitely increasing options out there and one of the things we’ve seen as an advisor is the cost of those choices reducing to the extent that it’s actually cheaper to go and use ethical funds, than mainstream multi assets with some of the providers.  You certainly wouldn’t have seen that even two years. On the whole, Ireland is getting a grip on climate in the context of pensions

JM: I think it has to be that way. There’s no point in having great pension in 40 years, if the planet is a complete mess.  The big asset owners do have a role in driving that change.