The journey to net zero

01-Mar-2021
  • Sion Cole

Five years ago, adding an environmental, social and governance (ESG) tilt to your investment portfolio was seen as a nice-to-have. Today, there is a recognition that if you don’t consider this, it will impact performance. This has added pressure to time-pressed pension trustees to consider the potential effect of climate change on their scheme’s investments.

It’s been a torrid year across the globe, but one of the few positives has been that efforts to tackle the climate crisis haven’t diminished. At the start of the pandemic, there were fears the world was too preoccupied and that global action on climate change would slow. But instead, the pandemic shone a light on how precious our way of life is and how we must do everything we can to protect it.

There were encouraging commitments on climate change from many quarters in 2020. Governments responsible for more than three-fifths of the world’s emissions and more than 1,100 individual companies are considering or already implementing net-zero commitments.1 Investors in mutual funds and ETFs also voted with their feet on the matter. Between January and November 2020, they poured US$288 billion globally into sustainable products, marking a 96 per cent increase over the whole of 2019.2

The rising interest in sustainable investing has undoubtedly been helped by a wider choice of investment products; we at BlackRock have added nearly 100 new sustainable funds. There is also a growing acknowledgment that sustainability doesn’t equate to lower returns. In 2020, more than four-fifths of a globally-representative selection of sustainable indices outperformed their parent benchmarks.3

A long-term trend in pension fund space

I believe this topic will grow in importance for pension funds in coming months and years as it takes an increasingly central role in every aspect of our lives. It is a topic that will be much debated at trustee meetings.

We believe the transition to net zero creates investment opportunities: in companies that have business models supporting the decarbonisation of the economy, for example. Investors seem to be waking up to this. A recent survey by BlackRock showed respondents intend to double their sustainable assets under management in the next five years.4

We want our clients to be ahead of the game and so are taking steps to help investors prepare their portfolios for a net-zero world. This year we will publish the percentage of our assets under management that are aligned to net zero and set an interim target for where we want that to be by 2030. We will also incorporate the impact of climate change into our capital market assumptions – the long-term estimates of risk and return that form the base of how we build investment portfolios – and launch new investment products with explicit temperature alignment goals.

Fiduciary management can ease the ESG burden

The pensions landscape is constantly changing and trustees are facing increased ESG demands from their stakeholders as well as new regulations.

Since October 2019, pension trustees have had to include ESG issues in the list of financially material considerations in their statement of investment principles. And from this October, trustees of plans with more than £5 billion in assets will be required to report on the financial risks of climate change within their portfolios.5This will be extended to schemes with more than £1 billion in assets from October 2022.

We will work to help pension schemes embed ESG into their investment processes and our UK public policy team can provide guidance on the compliance of new regulations. We can also help with the risk management and analysis of the impact of climate change on a portfolio. With our new Aladdin Climate tool, we can help clients better assess climate risks across all asset classes in their portfolios.

As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further. And because this will have such a dramatic effect on how capital is allocated, every scheme will need to consider the subsequent impact on their portfolio. We recognise that every scheme has different requirements and we will work with trustees to ensure we build a portfolio that recognises the scheme’s circumstances and challenges to meet its retirement goals.

The focus on ESG is likely to continue its ascent in 2021 and beyond. We are committed to providing trustees with the solutions, tools and the data to navigate the transition and to help them achieve the outcomes they seek on this journey to a greener future.

Sion Cole
Managing Director
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