Asset owners, business leaders and pensions funds collectively hold the power to put the global economy on a sustainable footing. Pension funds are in a unique position of both vulnerability and strength: susceptible to the risks of an unsustainable future, but possessing the influence to promote positive outcomes.

With just five years until the Paris Agreement’s 2030 deadline for halving carbon emissions, we face the possibility that we will fail to achieve the UN’s Sustainable Development Goals (see below) and thus avert a 1.5°C temperature increase above pre-industrial levels. What, if anything, is preventing investors and corporate leaders from conducting their business more sustainably?

Pension funds and corporate leaders have a unique opportunity to drive the global economy towards a sustainable future

There are currently three challenges to sustainable investment decision making for pension schemes:

1. Some trustees’ narrow interpretation of ‘fiduciary duty’ to mean higher, short-term returns, at the expense of integrating sustainability measures into investment decision-making processes
2. The well-documented effects of greenwashing
3. How to realistically operationalise publicly announced net-zero targets by corporates around the world.

The Paris Agreement

At the UN Climate Change Conference in Paris, France, in 2015 (COP21), 196 countries legally pledged to try to prevent global temperatures rising by more than 1.5°C above pre-industrial levels.

To achieve this, it was agreed that greenhouse gas emissions needed to be reduced by 43% by 2030, and reach net zero by 2050. The overarching goal was to keep global temperatures “well below” 2°C above pre-industrial levels.

Each country would set its own emission-reduction targets, reviewed every five years, and wealthier nations would help poorer ones adapt to climate change and move to renewable energy by providing ‘climate finance’ funding.

Since then, the UN’s Intergovernmental Panel on Climate Change has advised a worse scenario for crossing the 1.5°C threshold, and stressed a more urgent need to reduce global emissions.

Fiduciary duty in the UK

On fiduciary duty, my company Pensions for Purpose – a sustainable investment membership organisation for pension funds – has repeatedly highlighted the need for clearer government guidance on striking a balance between sustainable investing and risk-adjusted returns, to benefit pension funds. During a Question Time in the House of Lords, one peer said they would consider whether pension trustees need additional support on fiduciary duties, saying “we certainly think it’s right that guidance is given”.

The Impact Investing Institute commissioned legal research on how to interpret fiduciary duty (Impact investing by pension funds: Fiduciary duty – the legal context) suggesting that maximising returns isn’t always the most appropriate view for trustees. Trustees must also consider a pension scheme’s context, maturity and member investment journeys.

Fiduciary duties in impact investing are shaped by trust deeds, case law and legislation, including the Pensions Act 1995 and the Companies Act 2006. Trustees must act in beneficiaries’ best interests and consider financially material factors. By following legally correct decision making, trustees can fulfil their fiduciary duty.

Greenwashing and net-zero targets

The second and third hurdles to sustainable investment decision making – greenwashing and net-zero target difficulties – are related.

Despite increased awareness following the 2022 DWS incident – when the asset manager, majority-owned by Deutsche Bank, was raided by German prosecutors over allegations it had misled investors about ‘green investments’ – greenwashing remains a significant challenge for those trying to direct capital towards genuinely sustainable investments. Concurrently, organisations’ publicly announced net-zero ambitions often lack scrutiny, regulation or official reporting, leading to insufficient transparency, inconsistent standards, and limited accountability and impact.

The 2023 Corporate Climate Responsibility Monitor report indicated that large corporations’ sustainability pledges often lacked integrity, although a minority were carrying out replicable good practice. And 2022 research by Accountants for Sustainability, through its Finance Leaders’ Sustainability Barometer, found a gap between companies’ sustainability ambitions and the work being done to make them a reality. Less than half of the CFOs surveyed thought their finance team had the skills and competencies required to achieve their corporate sustainability objectives.

As well as investing in training, skills and resources, CFOs and other leaders can engage boards and management teams in the journey to net zero. For example, CFOs can demonstrate the business case for change by identifying risks and opportunities – such as the macro sustainability trends to which organisations will be exposed both now and in the future – and outlining how these risks can be identified and managed, and opportunities capitalised on. A finance culture that integrates sustainability considerations into financial decision making, supporting a move towards net zero, should also be developed.

Next steps

The next step is to create a net-zero roadmap, which will require setting intermediate emissions-reduction targets and identifying actions through which they can be met, such as analysing CO2 emissions, reducing high-emission activities and crafting mitigation strategies. To align financial plans with sustainability objectives, CFOs should integrate net-zero goals into strategic planning and budgeting. This could be done by:

• Incorporating sustainability criteria into investment decisions
• Assigning carbon budgets to business units
• Adopting eco-friendly procurement policies
• Using metrics to evaluate performance on environmental, social and governance (ESG) factors in financial statements
• Disclosing climate-related risks.

Measuring an organisation’s progress towards net zero while avoiding greenwashing will involve integrating natural, social and human capital data into decision making, using frameworks such as the Task Force on Climate-related Financial Disclosures. Other approaches include tracking emissions against reduction targets, disclosing ESG in financial statements, and establishing sustainability-focused key performance indicators that will be monitored over time, with performance transparently included in annual reports.

To fund an organisation’s net-zero transition, finance teams can engage with investors transparently, issue green bonds or sustainable finance instruments, and comply with reporting requirements by disclosing climate-related risks. Steps include developing a climate risk management plan, conducting scenario analyses and reporting risks in annual reports. Assessing climate risks and creating a risk-management plan could address the potential effects on operations, supply chains and stakeholders.

The 17 SDGs
The UN’s Sustainable Development Goals (SDGs), adopted in 2015:

1. No poverty
2. Zero hunger
3. Good health and wellbeing
4. Quality education
5. Gender equality
6. Clean water and sanitation
7. Affordable and clean energy
8. Decent work and economic growth
9. Industry, innovation and infrastructure
10. Reduced inequalities
11. Sustainable cities and communities
12. Responsible consumption and production
13. Climate action
14. Life below water
15. Life on land
16. Peace, justice, and strong institutions
17. Partnerships for the goals

The role of pension trustees

Pension trustees can contribute significantly to the world’s carbon-reduction goals by:

• Taking proactive measures
• Encouraging companies to be transparent about their sustainability performance and setting achievable targets
• Supporting sustainability proposals at company meetings by exercising their shareholder voting power
• Promoting greater accountability and driving positive change among corporates.

These measures can be effective, especially when trustees act collectively with other stakeholders and have a well-defined plan for portfolio firms that do not meet previously set sustainability expectations. Effective stewardship is a potent instrument that investors can use to encourage companies to adopt low-carbon strategies, and it has worked in the past to persuade major corporations to make good on their targets – for example, engagement by ‘Climate Action 100+’ with investors led to a net-zero commitment from the energy company Shell.

Organisations’ net-zero ambitions often lack scrutiny, regulation or official reporting, leading to insufficient transparency, accountability and impact

Finally, trustees ought to oversee strategies and collaborate with their advisers and other service providers to pinpoint and manage ESG risks and greenwashing.

Other stakeholders

The Financial Conduct Authority’s (FCA) plans to implement sustainability disclosure requirements for asset managers will prevent managers from exaggerating their investment funds’ sustainability aspects. After receiving feedback from a public consultation, the FCA plans to refine its approach to the labelling of sustainable investment products, asset classes and strategies. This will clarify the criteria for sustainable labels and ensure a broader range of funds are included, promoting transparency and hindering greenwashing.

Pension funds and corporate leaders have a unique opportunity and responsibility to drive the global economy towards a sustainable future. They must collaborate and act decisively to overcome the challenges associated with fiduciary duty interpretation, greenwashing and net-zero target setting. By being transparent and accountable, and continually improving, financial leaders can have a lasting effect on carbon-reduction initiatives.

The world needs sustainable investment, and these influential players have the power to propel us all towards a sustainable future.

 

 

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