Investment Institute

Why now is the perfect time to act on climate change

  • 06 December 2021 (5 min read)

“Human influence has warmed the climate at a rate that is unprecedented in at least the last 2000 years.”1

The latest Intergovernmental Panel on Climate Change (IPCC) report doesn’t mince its words.

And rightly so: the science is stark; the required policy decisions are clear. The risks are existential.

Against this backdrop, top of the agenda for many pensions may be considering how to integrate climate specific objectives into their portfolios.

As a result, considering climate risk may be becoming increasingly important.

There are three major factors at play when considering any action around climate.

The first is regulation. Under guidance from the Department for Work & Pensions(DWP), from October 1, 2021, the largest UK pension schemes will be subject to far more stringent climate change governance and disclosure requirements2 , with medium and smaller schemes set to follow over the next couple of years.

Preparing for these requirements may require significant changes to be put in place.  Investors may want to get ahead of the regulation and start putting steps in place now to properly understand the guardrails around disclosure.

This may also be an opportunity to look at what larger counterparts are doing and publishing to see how they can use this information to inform their own decisions and integration.

The second is the increase in quality data. Better data enables better decision making.

There was a time when asset managers, asset owners and the issuers of securities could argue that poor data impeded meaningful action on climate.

Not so today as the data is exponentially better. And it is not just carbon data that is improving. Today there is a dashboard of climate-related metrics that provide better coverage and availability of data from initiatives such as the Science Based Targets Initiative, Transition Pathway Initiative as well as in areas such as the measurement of climate value at risk.

This still improving data empowers the investment community to take better action and for asset owners to hold their managers to account on decisions made.

Third, supply of green securities is starting to balance out with demand, meaning a greater proportion of new market issuance is coming from the green, social and sustainability bond market.

Growing demand is helping some of the ‘green premium’ around these assets

An increase in issuance from a broader range of sectors – outside of just utilities and financials which have previously dominated – is also creating better diversification opportunities.

But the direction of travel in debt markets may be clear and, from a climate perspective, very helpful.

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