The DWP’s proposals to insist that pension schemes set targets and use standard measures to report on the impact of the money they invest makes sense. But like the few radical interventions that work (think auto-enrolment), it is likely to be misunderstood. This is already happening.

The Government’s demands on schemes to report with various measures and to set certain sustainability targets are being taken as investment instructions. They are misunderstood by clever people who have not thought through the nuance but assumed big Government is  dumb government.

Take my good friend David Harris’ comments on the latest consultation and regulations on TCFD

The Government’s prescription is not on where to invest but on what to measure. A sinful scheme is allowed by legislation but will it be tolerated by an increasingly concerned membership?

The intervention Government is taking is simply about reporting. The DWP assumes that when people start seeing the publication of scheme targets and data on what is measured, they will start to apply pressure. But all that is reported is not always read and the question “how green is my pension?” has yet to become as cogent as “what is the R number?”

The task of Government now is to make sure that people to consider their pension as mattering to the planet with the same urgency as they consider their behaviour mattering to the infection rate of the pandemic.

Making money matter

The Government may take issue with the simplistic approach of “Make my Money Matter” , who do argue for disinvestment from sin stocks, but they need a populist movement to focus attention on the capacity of pensions to matter in meeting climate goals.

My partner, whose pension schemes have over £60,000,000,000 of other people’s money in them, hasn’t any time for what she calls the antics of Richard Curtis either. She is appalled by the  MMMM  “bandwagon” and berates me when she finds me Zooming with them. But she is adamant that the various pension schemes she runs will enthusiastically adopt TCFD because it measures risk and allows risk to be mitigated.

Put simply, if you can’t measure risk, you can’t manage it and there is no bigger risk to the assets held by her pension schemes than the impact of climate change.  Frankly, she too should be grateful to MMMM’s populism, as it will allow her schemes to shine (in time). The end does justify the means and though I share my partner’s dislike of “cheap shots”, I support MMMM and what they do.

That’s because mobilizing people to the message that pension schemes can make our money matter will change the way pension schemes work – for the better.

So what if people do get the message?

There seems to be an assumption that ESG and TCFD and all the measures we are talking about are pension issues and that nobody pays their pension much attention.

So what does happen if people want their money to matter? What happens when people start considering their money not as “financial capital” managed in the City but as “social capital” as a “catalyst for change”?

Might it be possible that the targets adopted by pension schemes and their measures become matters of public interest?  Is it possible that trustees and IGCs are held to account for what they target and how much they have contributed to the great endeavor to avert the impact of global warming?

Might the trustees and IGCs wake up to their own importance and take their jobs more seriously?

Engagement has its downsides!

Transparency of reporting on the carbon footprint of the scheme, the value at risk from climate change and even the success trustees have in getting the data they need to do the TCFD stuff will lead to people making comparisons.

If people have access to data and are interested they will use the data to compare sheep with goats and league tables will emerge showing which schemes are making our money matter and which are not. This scenario is where transparency takes us and it will make a lot of pension people very anxious as not everyone will be at the top of the table.

Engagement has its downsides, it leads to people who do not do their job well , being shamed and even sacked. This is what public scrutiny does – ask the politicians!

But without public scrutiny, pension schemes will not change, which is why the Pension Schemes Bill/Act legislates for getting this reporting mandated. We can say this with confidence because, despite the science telling us a crisis is coming, pension schemes have not changed. Even now they are following not leading. To use Ben Pollard’s phrase, pensions are the sleeping giants.

Why I support the DWP’s “measures and targets” approach.

There is a final point that unfortunately needs to be made. There are an awful lot of people who see “Environmental, Social and Governance” as a banner behind which they can open a pension schemes cash register and rob the till. The practice of green-washing, where a half-hearted coat of paint is applied at great expense and to no effect, needs to be discovered and banned.

There is no quick fix to the problem of global warming and ESG is not a marketing gimmick to promote new business. Work on ESG  is instead a sunk cost that should reduce fund managers margins and improve the value we get for our money.

The arguments that “all this ESG stuff will put up fund management costs” cuts no ice with me. The business of knowing what is going on inside a portfolio of bonds or equities or property or any alternative asset class is now the core business of any fund manager whether they want to call their funds green or environmental or sustainable or not. All funds are ESG funds because they all report to TCFD and are judged by the same targets.

What will happen is that fund managers will change the way they compete and start targeting a position at the top of the TCFD target tables. No doubt there will be some cheating and some scandals along the way, but what will happen – because of this Governmental intervention, is that the game will change – and change for the better.