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How can UK pension schemes measure their impact?
It is often difficult to truly measure the impact of investments. With a lack of consistency with the metrics that are used, there is no agreement on the exact concept and content of climate investing.
However, this is changing and the increased focus on climate investing is improving the measurability and the accessibility of impact-focused investing. It is on pensions schemes to make these investments and the rest of the industry will follow.
There are a number of ways pension schemes can measure their impact:
Why is this so important for UK pension schemes?
Pension schemes have large pools of capital and so the responsibility is on them. Pension funds represent around $54 trillion – a little over a third of the entire $154 trillion global asset management industry. Wherever pensions direct their attention, change follows.
The shift from defined benefit (DB) to defined contribution (DC) schemes has been gathering speed, with DC schemes in the UK is now around £500billion in size, and is forecast to top £1 trillion by the end of the decade. This is significant because DC members are more active in directing their savings to positive change, with much greater sensitivity to ESG. According to Willis Towers Watson there has been a “step change” in the importance of ESG with 50% of schemes likely to offer ESG as part of their default option in the short-term.
Crucially, there is also a significant mismatch between those expressing specific interest in climate friendly funds, and the number that have yet acted upon it. The Defined Contribution Investment Forum found that 74% of UK savers were either ‘very interested’ or ‘somewhat interested’ in climate friendly funds. However, the same survey found that just 9% have actually invested in climate friendly funds via their pension. We strongly argue that after COP26 this desire has increased, but there is a need to provide appropriate solutions for savers, if they are to act.
Wherever pensions direct their attention, change follows
The need for investment in order to tackle climate change is greater than ever
What is climate investing?
Climate investing refers to capital directed towards projects and technologies that have the intention to contribute to the positive climate outcomes (e.g. CO2 emission reduction). These can be split into three core pillars of climate investing: climate mitigation, carbon capture and climate adaptation.
Mitigation aims to reduce or prevent the emissions of greenhouse gas emissions. This is achieved through improved efficiencies and the use of new technologies and energy efficient equipment. This is critical to the energy transition movement, hence the importance of large scale and reliable renewable energy.
Capture activities aim to directly remove CO2 and other harmful emissions from the atmosphere either naturally, like forestry, or through emerging technologies.
Finally, climate adaptation activities aim to increase resilience to those most vulnerable to current and expected climate change such as water preservation, early warning systems for extreme weather events, and climate insurance.
These technologies and projects require new patient capital to fund and develop, hence the significant opportunity we see for investors to drive positive climate impact and benefit from financial returns through private assets solutions.
You can
watch the interview here
or read their views below
Jack Wasserman, Investment Director, Impact Strategies at Schroders Capital, explains what we mean by climate investing and the role private assets can play in positive climate solutions.
Emily Pollock, Solutions Director at Schroders Capital, argues that pensions schemes can lead the way in climate investing, but often find it difficult to truly measure the impact of investments.
INTRODUCTION | Video interview | Climate Investing | Private MARKETS | UK pension schemes
Private MARKETS
Climate Investing
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INTRODUCTION
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Schroders Capital, on why private assets are an integral part of climate investing
Columbia Threadneedle Investments' Sonal Sagar & Michael Hamblett
INTRODUCTION | ASSET CLASS | THE FUND | portfolio snapshot
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THE FUND
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INTRODUCTION
Why are private assets such an integral part of climate investing? How does it differ from the public markets?
The UN’s Net Zero Financing Roadmaps estimate that over 70% of the direct investment needed to reach net zero could come from private investment, offering huge opportunities for investors.
Private investments will largely target climate impact through mitigation rather than adaptation. This is because mitigation-related investment offer measurable climate benefits (such as CO2 emission reduction).
Private assets play an important role in climate investing for three main reasons. Private investments are closer to the assets, have a longer timeframe for investment and can target the most impactful industries.
Other benefits of private assets investing include:
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Increased focus on climate investing is improving the measurability and the accessibility of impact-focused investing
UK pension schemes
Residual risk
The need for investment in order to tackle climate change is greater than ever as rising temperatures have worsened extreme weather events, destroyed lives and homes, and transformed natural habitats. To achieve the targets of the Paris Agreement, the World Bank indicates that climate financing must be counted in the trillions, not billions.
It is estimated that global climate investment reached $630bn in 2020, an increase of 9.8% on the previous year but significantly short of the $16.8 trillion target investments needed until 2030, both in climate adaptation and mitigation.
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1 Source: Climate Policy Initiative, 2021
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Innovation/technology is critical for climate finance, and a significant amount of innovation is driven by private companies.
Private companies benefit from strong ownership, active governance and long-term investment horizon and perspective of owners without the pressure to focus on quarterly financial results.
Private asset investors focus on value creation and operational improvements – such initiatives may contribute directly or indirectly to climate action targets through improved value chains.
Private assets provide access to a broad range of industries, sectors, size of investment and geographies which investors cannot access via the public markets.
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Setting clear goals and expectations. It is important for investors to focus on the relevant metrics to both set goals and evaluate the impact of different investments appropriately.
Considering the effects an investment has through the core spheres of impact from an social or environmental perspective.
Science-based targets are becoming more common with organisations wishing to set net zero targets, with almost 3,000 institutions taking action and 1,000 committing to net zero pledges with the Science-Based Targets Initiative (SBTi), including Schroders.
Consistent and transparent approach to calculation is also important. The Partnership for Carbon Accounting Financials (PCAF), is widely seen as the best practice in this area.
2 Source: Willis Towers Watson, Global Pension Asset Study 2021
3 Source: Willis Towers Watson, Global Pension Asset Study 2021
4 Source: Willis Towers Watson, FTSE 350 DC Pension Schemes Survey, 2021
5 Source: DCIF, The key to unlocking member engagement
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INTRODUCTION | Video interview | Climate Investing | Private MARKETS | UK pension schemes
UK pension schemes
Private MARKETS
Climate Investing
Video interview
INTRODUCTION
Marketing material for professional clients only.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Schroders has expressed its own views and opinions in this material and these may change.
This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Information herein is believed to be reliable but we do not warrant its completeness or accuracy.
Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data.
The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion.
Any references to securities, sectors, regions and/or countries are for illustrative purposes only.
Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage.
For your security, communications may be recorded or monitored.
Issued in May 2022 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered in England, No. 4191730. Authorised and regulated by the Financial Conduct Authority.
The need for investment in order to tackle climate change is greater than ever as rising temperatures have worsened extreme weather events, destroyed lives and homes, and transformed natural habitats. To achieve the targets of the Paris Agreement, the World Bank indicates that climate financing must be counted in the trillions, not billions.
It is estimated that global climate investment reached $630bn in 2020, an increase of 9.8% on the previous year but significantly short of the $16.8 trillion target investments needed until 2030, both in climate adaptation and mitigation.
1 Source: Climate Policy Initiative, 2021
Innovation/technology is critical for climate finance, and a significant amount of innovation is driven by private companies.
Private companies benefit from strong ownership, active governance and long-term investment horizon and perspective of owners without the pressure to focus on quarterly financial results.
Private asset investors focus on value creation and operational improvements – such initiatives may contribute directly or indirectly to climate action targets through improved value chains.
Private assets provide access to a broad range of industries, sectors, size of investment and geographies which investors cannot access via the public markets.
•
•
•
•
2 Source: Willis Towers Watson, Global Pension Asset Study 2021
3 Source: Willis Towers Watson, Global Pension Asset Study 2021
4 Source: Willis Towers Watson, FTSE 350 DC Pension Schemes Survey, 2021
5 Source: DCIF, The key to unlocking member engagement
2
3
4
5
Setting clear goals and expectations. It is important for investors to focus on the relevant metrics to both set goals and evaluate the impact of different investments appropriately.
Considering the effects an investment has through the core spheres of impact from an social or environmental perspective.
Science-based targets are becoming more common with organisations wishing to set net zero targets, with almost 3,000 institutions taking action and 1,000 committing to net zero pledges with the Science-Based Targets Initiative (SBTi), including Schroders.
Consistent and transparent approach to calculation is also important. The Partnership for Carbon Accounting Financials (PCAF), is widely seen as the best practice in this area.
•
•
•
•
Increased focus on climate investing is improving the measurability and the accessibility of impact-focused investing
Marketing material for professional clients only.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Schroders has expressed its own views and opinions in this material and these may change.
This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Information herein is believed to be reliable but we do not warrant its completeness or accuracy.
Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data.
The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion.
Any references to securities, sectors, regions and/or countries are for illustrative purposes only.
Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage.
For your security, communications may be recorded or monitored.
Issued in May 2022 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered in England, No. 4191730. Authorised and regulated by the Financial Conduct Authority.