New research from Pensions for Purpose, an organisation that helps pension funds invest for impact, has shown that active asset managers are not using climate indices to benchmark their carbon metrics, despite their funds being labelled as ‘climate focused’.
The research – which looked at 24 leading asset managers representing a total of €29trn in total assets and offering climate-focused funds to UK pension schemes – instead showed that 73% of active climate-focused investment funds are benchmarked against the market capitalisation index rather than a climate index, from both a financial and climate impact perspective.
A further 19% of active climate-focused funds don’t have any benchmark at all, it revealed.
Climate benchmarks give managers specific objectives related to the greenhouse gas emissions in a fund’s portfolio. The research states that the concern is, active asset managers are opting for an easy life.
Karen Shackleton, chair and founder, of Pensions for Purpose, said: “We were surprised by the number of climate-focused active funds which don’t benchmark themselves against a climate index.
“The question this raises is whether active managers could set a higher bar when considering their carbon footprint, by benchmarking against a climate index rather than comparing themselves with the market capitalisation index which has much higher carbon metrics, even if they keep the market cap index as the performance benchmark.”
According to the research, 142 different climate carbon benchmarks are being used across just 212 funds, with no commonality in the choice of benchmark used.
This lack of standardisation makes it harder for investors to compare one fund against the other when making a fund selection decision. The asset managers interviewed for the research had mixed views on whether there will be a move towards consensus benchmarks or a shift towards more tailored benchmarks designed to meet pension funds’ specific climate goals.
The research also showed the unexpected impact on carbon metrics when shifting from low carbon to Paris-Aligned benchmarks. A pension fund investor could experience an increase in carbon footprint if relying on the same metric to evaluate performance against carbon objectives.
For pension funds tracking their carbon footprint year-on-year, this is an important insight as the switch could result in a temporary increase in their portfolio carbon measure.
Shackleton added: “Overall, it’s important for pension funds to have clarity in their investment beliefs – what is the pension fund trying to achieve? – as well as how success in the fund’s climate action approach will be assessed over time. What comparators, for example, what benchmarks, will be used to make that assessment?”
WTW’s marketplace launches climate reporting hub
AMX, an institutional marketplace set up by WTW in early 2017, has today launched a climate reporting hub which will help pension funds meet climate reporting requirements.
AMX Zero, a low-cost climate reporting hub, will enable pension trustees to solve the problem of fragmented climate data and lack of standardised reporting in order to meet their regulatory responsibilities on climate, it was announced.
2022 is a landmark year for climate regulation with the UK government requiring large pension schemes to produce reporting that follows recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD), with smaller and medium-sized schemes following next year.
Encouraged by industry bodies such as the Pensions and Lifetime Savings Association (PLSA) and Accounting for Sustainability, many UK pension funds have taken significant strides in implementing climate polices in recent years, such as committed net-zero targets and climate targets built into investment selection criteria.
However, pension trustees face a significant challenge navigating a complex and fragmented investment ecosystem that hasn’t historically developed standards for data and reporting.
Oliver Jaegemann, AMX’s chief executive officer, said: “Simply put, we cannot rely on the tools of the past to solve the most complex challenge of modern times.”
AMX Zero, he said, is a service that brings together investment consultants, asset managers, data and climate specialists through one seamless and accessible technology solution.
“If the investment industry is to lead the way, we must come together to create a solution that facilitates standardised climate-related reporting for all pension schemes,” he added.
AMX Zero manages the complexity of connecting and collecting data on behalf of pension funds and produces five standardised metrics that are used to produce schemes’ TCFD reports.
Over the next two-to-three years pensions trustees will be required to adapt to TCFD, starting in the UK but expected to become standard in other jurisdictions, as well as the EU Sustainable Finance Disclosure Regulation (SFDR).
However, a structural change is also occurring in the investment industry that is not being driven by regulation, with more considerations being taken in the investment processes that fall outside traditional performance metrics, broadly referred to as ESG criteria, Jaegemann noted.