Over the past few years pension schemes have been on a significant ‘ESG’ journey. From understanding ‘Governance’ which many see as core to existing fundamental credit analysis, to building on the ‘Environmental’ side in line with a number of initiatives and disclosure improvements, and ‘Social’ being the least developed but very much with a renewed focus; particularly given impacts relating to COVID-19 and previous investments in social housing and essential services such as hospitals. The ESG approach and reporting requirements have evolved over time and vary from negative to positive screens, to engagement and stewardship through to the ‘net zero’ debate and whether portfolios can meaningfully evidence this.
Whether an asset owner targets net zero by either 2035/2040/2050 etc., this is not expected to be a portfolio cliff edge adjustment, but more akin to a glide path over time. That said, it is unclear if there will be a future market ‘Minsky Moment‘ should pricing of non ESG-friendly assets collapse leaving future “stranded” assets (in a situation where ESG related externalities and risks were not adequately priced in).
For pension schemes, whether that means changing their approach from the bare minimum according to the regulations (which we explain here) or leading from the front of the pack, an increase in ESG and climate risk-specific integration remains top of agendas.