Statements of Investment Principles (SIPs) increasingly refer to environmental matters. Several leading pension funds are taking active steps to ensure enhanced shareholder value in a shift to a low-carbon economy.

Curtailing greenhouse gas emissions to limit climate change is now a political priority in several countries. The EU has agreed a target to cut greenhouse gas emissions by 20% by 2020. “When you look at the scale of the challenges and opportunities before us, it seems to me that human society is now on the verge of a paradigm shift. In the past, economic growth has relied heavily on increasing carbon content and usage, to the cost of the planet. Our efforts to tackle climate change reverse all that.” José Manuel Durão Barroso, President of the European Commission, January 2008

Merrill Lynch in a research paper of August 2007 commented: “We think a regulatory drive will impact all companies across all sectors, not just the heavy emitters.”

Footprint reports

Pension fund trustees and fund managers can use Trucost’s carbon and full environmental footprint reports to understand companies’ environmental impacts in quantitative and financial terms. The risks for pension funds can therefore be identified and managed. Trucost has conducted carbon footprints of more than 400 funds with over £200 billion worth of assets under management.

”Trucost’s carbon footprint analysis has given us the first solid metrics on climate change issues in our fund. It has enabled us to have informed and in-depth discussions with fund managers on how they have taken ESG issues on board in our portfolios. In this way we are able to demonstrate our approach to responsible investments to fund members and stakeholders,” Mike Taylor, LPFA Chief Executive

”We have undertaken environmental footprint analysis using Trucost’s methodology for each of our active equity funds against their respective benchmarks. By measuring our footprint we aim to provide a fresh perspective on risk, stock selection and sector exposures,” Annual Report, Environment Agency Pension Fund

Financial returns and the environment

Recent analysis and back-tests by a number of blue chip asset managers who use Trucost data suggest that taking the environment into account in the investment process not only positions portfolios well in respect to rising environmental costs but has also led to better financial returns – see Trucost’s Pension Fund Briefing.

“We believe that in the medium term, in general, firms having a relatively low carbon footprint compared with that of their peers will be at a financial advantage.” Reacting to climate change, UBS, June 2007

Fiduciary Duty and the Environment

Since 2000, an amendment to the Pensions Act 1995 has required the Trustees of occupational pension schemes to disclose through their Statement of Investment Principles (SIPs) ‘the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments’.

In October 2005 Freshfields Bruckhaus Deringer produced a legal framework for integrating Environmental, Social and Governance (ESG) issues into institutional investment. This was undertaken for the Asset Management Group of the United Nations Environment Programme Finance Initiative.

The report concluded that: “Conventional investment analysis focuses on value, in the sense of financial performance… the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

The same point was stressed by Mercer Investment Consulting in A Climate for Change – A Trustee’s Guide to understanding and addressing Climate Risk, August 2005. In it they advised: “Policy impacts of climate change will influence the ability for companies to create and maintain wealth for shareholders (in the short- and long-term), pension trustees will want to ensure that these risks (and associated opportunities) are being addressed in relation to the funds in their care.”

The Conservative Party recommended in September 2007 that pension fund trustees should have to consider climate change when making investments. They will propose that the 1995 Pensions Act be amended to define the meaning of the requirement to cover "social, environmental or ethical considerations", and that pension companies include a climate change clause in their mandates to fund managers.