LGPS CIOs: climate change is the ‘biggest systemic risk’ to investors
In view of COP27, four CIOs at LGPS pools discuss the challenges and risks they face when addressing the ‘most important global megatrend’, which is climate change.
Local Government Pension Scheme (LGPS) pool’s chief investment officers (CIOs) have labelled climate change as the “biggest systemic risk” facing investors and called for more investor action and more meaningful government policy to help facilitate the net zero transition.
Four leading CIOs including David Vickers, Brunel Pension Partnership, Jason Fletcher, London CIV, Mark Lyon, Border to Coast (deputy CIO) and Gordon Ross, LGPS Central, took part in a Net Zero Investor panel discussion at the London Stock Exchange to reflect on their net zero ambitions and concerns.
Against the backdrop of COP27 in Sharm el-Sheikh, the panel of pools, whose partner funds’ combined assets under management are £188bn, drilled down into their net zero targets and the biggest risks they face in trying to transition their funds.
Vickers said: “Climate change is the biggest systemic risk we face as investors and as a society, to ignore that risk, I think would be the [opposite] of financial responsibility.”
He added that aligning to net zero is in the “financial best interests” of Brunel PP’s fiduciary duties and its members.
Net zero, continued Vickers, was the “biggest economic systemic change since the Industrial Revolution” and to not act on it would mean missing out on the new opportunities it presents.
“Net zero is about capturing these opportunities as much as avoiding some of the risks around stranded assets and nuances,” he said.
Ross added to Vickers’ comments by explaining how LGPS Central sees net zero as “a global megatrend”, which is “probably the most important [megatrend] that has ever been and ever will be”.
Essentially, it is what you do that matters, not what you measure or what you audit. It's actually what are you doing to improve the planet or improve the temperature of the earth.
Complacency within governments
Although Ross went on to warn that a current threat to the transition is “complacency” within the current UK government and world leaders. He highlighted that Britain is now on its third government within the year, which has caused several policy changes and does not show “continuity or determination” on net zero policy.
“If politicians and countries start getting complacent, there will be no incentive for companies to just listen to investors because, at the end of the day, it's a far smaller pressure group,” Ross said.
Similar to Ross, Lyon highlighted that a lack of credible and stable net zero policy is a big risk that threatens the net zero transition. This is because long-term investment cycles tend to not align with shorter-term political cycles, in turn making it harder for investors to make net zero investment commitments.
He said: “As a result, an investor may want to build in an additional rate of return to cover the policy risk, which then makes it obviously more expensive to decarbonize.
“So, I think long-term stability in policy will be key to making sure that those early moves in investment spread out and you've got significant investment from all parts of the investment industry.”
Climate change is the biggest systemic risk we face as investors and as a society, to ignore that risk, I think would be the [opposite] of financial responsibility.
Inaction towards net zero
However, Fletcher pointed out that inaction is also present within the investment industry as companies are spending too much time focusing on measuring emissions and “throwing stones at each other” about greenwashing, rather than dealing with the crisis.
“Essentially, it is what you do that matters, not what you measure or what you audit. It's actually what are you doing to improve the planet or improve the temperature of the earth.
“So, I think that's the critical thing, it's actually doing, rather than spending too much time discussing, talking, measuring and arguing about how we measure. I think let's get on and do something is the key message.”
