As part of Vidett’s Sustainability service line, I recently participated in the HSBC Bank Pension Scheme’s event, Narrative Climate Scenarios: Bringing the Real World into Decision-Making. While the event was insightful, the message was clear: the effects of climate change are immediate, and as pension scheme trustees, we must manage the associated risks and contribute to the transition to net-zero emissions by 2050. As trustees, we have a fiduciary responsibility to our members—not only to secure their financial future but also to contribute to a world that is sustainable for their retirement.

Given the broad and complex nature of climate change, it’s understandable to ask: What actions can we take as trustees? The event underscored the need for action, and highlighted key areas all trustees can consider to move their scheme towards a more sustainable future. Here are three strategies we believe will drive significant progress toward sustainability.

1. Understand and document the physical risks that will impact your pension scheme

As the effects of climate change become more tangible, it’s crucial to understand how your pension scheme could be affected. To fulfil our fiduciary duty to members, trustees need to consider the risks that climate change poses to their scheme’s investments. The No Time to Lose New Scenario Narrative for Action on Climate Change report highlights that even if emissions decrease, the existing stock of emissions makes further increases in the global average temperature almost inevitable.

In 2023, the onset of ‘El Niño’ brought about significant disruptions in global weather patterns. El Niño and ‘La Niña’ (expected in summer 2024) have disrupted industries where pension schemes may hold investments. These include agriculture and commodity markets, affected by extreme flooding, and general stock market funds impacted by reduced economic output globally as infrastructure is destroyed and temperatures rise.

Understanding how climate change creates physical risks for your pension scheme is the first step towards mitigating them. Trustees should incorporate climate change into their risk registers, treating it with the same rigor as any other critical risk.

2. Look for opportunities to invest in green assets

In their April 9, 2024 press release, the UN deputy chief warned that an urgent surge in investment and reform of the international financial system is required to rescue the Sustainable Development Goals. Currently, much more invested money works against these goals than toward them. However, as Environmental, Social, and Governance (ESG) funds continue to perform in line with or outperform traditional investments, trustees can afford to be more selective with their scheme’s investments without neglecting their fiduciary duties.

As companies and countries accelerate their transition to net-zero emissions, trustees should view green assets as not only environmentally responsible but also financially prudent investments. Investments in green energy and technology that support the transition to net-zero now represent attractive growth assets, improving scheme returns in the medium to long term while also reducing risk by diversifying investments away from vulnerable industries.

Additionally, should government mandates accelerate the shift towards renewable energy, strategic investments in green technology today could yield substantial future returns, making them a vital consideration for trustees.

3. Take concrete action now, not later

Modelling the precise impact of climate change on pension schemes presents significant challenges. Consequently, there is a tendency among trustees to delay action and request more data in an attempt to refine models. Unfortunately, the effects of climate change are already here; we can no longer afford the luxury of waiting for more information. However, collective action across the industry now can help mitigate the risk of worst-case scenarios.

This could involve requesting actionable insights from advisers or ensuring your scheme’s banking relationships are with institutions that are committed to minimizing fossil fuel investments.

Climate change is a far-reaching issue that no one person or organization can solve overnight. But it is crucial to recognize that, as trustees, we have the ability to drive meaningful change. The time to act on these issues is now.

If you would like to discuss sustainability or ESG, please contact Sarah Booth or one of our Sustainability team members.