IGG’s Tegs Harding takes a holistic view of sustainability reporting, incorporating nature-based and social factors as well as established climate issues.

Step by step, we are seeing more people realise the power pensions have to play an integral role in securing a more sustainable future.

Trustees are central to this by meeting their fiduciary duties towards members, including reporting and administrative requirements.

Trustees of defined contribution (DC) schemes are responsible for ensuring their members get the best retirement outcome they can, which means using their influence to preserve a stable economy by tackling the climate crisis.

They are in a privileged position where their investment decisions have the potential to create a better future, and it is within their gift to take greater action on sustainable investing initiatives.

Making tangible progress

IGG launched our Sustainability Charter in July 2023, calling on the pensions industry to take greater steps and more responsibility for making sustainable choices.

We want to ensure sustainability is front and centre in the trustee decision-making process. For this to happen, trustees and others – in fact, everyone involved in the pension lifecycle – must understand the ‘why’ behind their actions and how this corresponds to their fiduciary and reporting requirements.

In particular, trustees must be equipped with the knowledge to understand the significance of the current climate situation.

Current models used by many asset managers in investment decision-making processes do not typically reflect the severity of climate issues nor the current tipping points we face. This needs to change.

As we look to 2024 and beyond, trustees are uniquely positioned to work alongside other industry stakeholders to boost overall engagement in climate and sustainability issues.

Not least, they have an exclusive remit to report on the impact of sustainability activities, in line with requirements from the Task Force on Climate-Related Financial Disclosures, the Taskforce on Nature-related Financial Disclosures, and more recently the UK’s Taskforce on Social Factors.

While these measures are notable in improving transparency and motivating schemes to integrate a host of environmental, social and governance-related targets to their decision making, there is a pressing need to go further. The siloed nature of current reporting and the focus on collecting rather than understanding data imposes limits on their real-world impact.

Potential solutions

Rather than focusing exclusively on meeting reporting requirements and risk missing the wood for the trees, we need to encourage trustees to consider climate and sustainability risks in context of the three key levers at their disposal: divesting, engagement and shifting capital.

Taking a dashboard approach to monitoring risk and target setting is more helpful for driving real world change than a narrow focus on any one metric. This also recognises that you can’t separate climate issues from impacts on nature or society.

Regulators also have a responsibility to ensure reporting is cohesive across the third parties involved in pension scheme management and investment. There is little merit in trustees reporting estimated metrics that companies themselves do not use in the way they manage their businesses.

Reporting frameworks must work together for maximum impact and find ways to combine their influence across regulatory boundaries. Yes, there should be a push for greater disclosures, but this needs to start with companies for it to have a real world impact.

We also long to see broader recognition of differing scheme priorities. For example, schemes which are likely to run on for an extended period could realistically adopt more ambitious sustainable investment goals than those which are approaching insurance buy-out.

Making an impact

Savers today are now taking greater interest in how their pensions are invested, but there is much work still to be done.

Regulatory rhetoric is moving in the right direction but there remains some pushback from some corners of the industry, while ongoing geopolitical uncertainty risks distracting investors’ attention from the wider climate crisis.

To counter this, it is vital that trustees and other pensions professionals keep a line of sight on the emerging crisis we face in the natural world, and take tangible steps to mitigate against further damage.

As custodians of savers’ future livelihoods, it would be a disservice to them to not take this crisis seriously.