ESG – News
Industry view – Local Pensions Partnership
DEFINED CONTRIBUTION SCHEMES FAIL TO COMPLY WITH NEW ESG RULES
The majority of defined contribution (DC) schemes are not dis- closing how they are managing their ESG risks, despite the government making it compulsory, a sustainable investment campaigner has claimed. Since October 2019, all pension schemes have been required to publicly disclose how they are protecting savers against sus- tainability risks, such as climate change. Yet two thirds of trus- tee boards in DC schemes have not updated their statement of investment principles (SIP) four months after the govern- ment’s deadline expired, according to the UK Sustainable Investment and Finance Association (UKSIF). The majority of trustees have adopted a “thin and non-commit- tal” approach to managing environmental risks, the campaigner said, adding that smaller and medium-sized DC schemes were the worst offenders when it comes to non-compliance. Ben Nelmes, UKSIF’s head of public policy, described the rate of compliance as “appalling”. He identifies two key points of concern. “First, schemes cannot be held to account on the quality and appropriateness of their policies on financially material factors if they do not publish their SIPs. “Second, if the new requirement to publish a SIP has gone unnoticed by trustees, this could indicate that they have missed, or even ignored, other parts of the regulations, and are failing to prepare policies to manage financially material risks to people’s pension savings,” he added.
Yet despite these shortcomings, there is no certainty that The Pensions Regulator (TPR) will force schemes to meet their obligations under the new ruling. “We may take action against schemes where a failure to engage with climate risk and other ESG requirements appears to be part of a pattern of wider governance failings,” a spokesperson for TPR said. Going forward, the regulator intends to tell schemes directly what improvements it wants to see, identify non-compliance and set a process for enforcing the requirements. Trustees are now required to disclose how they incentivise investment managers to invest for the long term and factor ESG criteria into their decisions. From October 2020, schemes will also have to report on their voting behaviour and explain how they have implemented their ESG standards. However, the majority of DC funds responded to these new requirements by stating that they were invested in pooled funds and that a single investor cannot make an asset manager change their investment policy.
In addition, as of 2017, some 85% of DC investments were held in passive equity strategies, according to Cass Business School, resulting in limited exposure to individual companies. The regulator said that is working to educate trustees on cli- mate risks as it intends to launch a new consultation on the SIP guidance. This will be based on the framework of the Tasforce on climate- related financial disclosures (TCFD), which will be launched at the PLSA investment conference in March.
INSURANCE PROTECTION GAP HIGHLIGHTS FINANCIAL RISK OF CLIMATE CHANGE
A sharp increase in natural disasters over the past decade has resulted in global economic losses of close to €3trn (£2.5trn), highlighting the scale of the transition risk that insurers are facing.
Less than a third of these losses have been insured, creating a protection gap of 72%, according to Aon.
Spikes in floods, storms and droughts wiped €232bn (£273.4bn) off the value of the global economy in the past year, the consul- tancy announced at a conference in London. Asia is the conti- nent most exposed to the financial risks of changing weather patterns and environmental damage with only 12% ($151bn) of the $1.23trn (£951.2bn) total loss covered by insurance. Aon predicts that parametric insurance, insurance risk pools or catastrophe bonds (cat bonds) will be new ways to improve risk mitigation in the world’s most vulnerable areas.
30 | portfolio institutional March 2020 | issue 91
Yet while institutional investor demand has grown for cat bonds as high-yielding debt, which distribute the risk of disas- ter events across capital markets, the past two years have high- lighted some potential pitfalls. At the end of last year, the global cat bond market stood at close to $37bn (£28.6bn) with almost $5bn (£3.8bn) issued in 2019 alone, according to Bloomberg.
As short-dated, high-risk debt, these securities offer average yields of at least 6%. However, the downside is that depending on the terms of the bond, an investor forfeits not just the inter- est, but also the principal in the event of a disaster. Investors in Cal Phoenix Re, a cat bond issued by US utility PG&E, had their fingers burnt in 2018 when they lost their entire investment following the outbreak of devastating wild- fires in California. Investors also took on part of the losses caused by 2018’s Hurricane Michael through a $100m (£77.3m) cat bond issuance by Frontline Insurance, which traded at half its value following the storm.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48
