🌍 Pensions for Purpose: Webinar Recap - Addressing Systemic Risks in a Changing World.

Last week, we explored practical approaches that long-term investors can use to reduce risks to their members and funds and improve the system. We had an insightful discussion on how pension schemes can navigate systemic risks, focusing on climate change and nature loss.

Pension schemes and other long-term investors face systemic risks that cannot be easily diversified away. Some of the world's largest asset owners are focusing on mitigating these risks to enhance the entire market's overall risk and return profile rather than just their individual portfolios. They understand that the impact of risks affecting the whole system can be much more significant than those within their own portfolios.

Many asset owners are revising their portfolio strategies in response to unprecedented global changes. Recognising that the consequences of the climate crisis, nature loss, and social inequality can't be ignored, they are seeking new strategies to address these pressing issues.

Key Takeaways:

Defining Systemic Risks:

Systemic risks, such as climate change and Nature loss, are unhedgeable and significantly impact long-term returns and pension payouts. These risks are immediate and require proactive management by pension funds. Nick Spencer highlighted that "a sustainable economy is achievable at one and a half degrees of warming, but financial markets will likely collapse before reaching four degrees. Pension funds need to take positive actions to manage or mitigate these risks."

Impact Investing:

Sean Gilbert highlighted the growing importance of impact investing, aiming to deliver both financial returns and positive social/environmental outcomes. He noted, "Simply delivering financial returns is no longer sufficient. Future generations expect investments to address big problems like climate change and social inequality." Integrating these investments into portfolios involves clear problem definitions and strategic asset allocation.

Nature and Biodiversity Loss:

I stressed the direct impact of biodiversity and Nature loss on asset values. I proposed reframing Nature restoration as an infrastructure investment. "A '2% for Nature' allocation from the £5 trillion in UK pension and wealth assets would generate the necessary funds to address the estimated £50-£100 billion needed for Nature restoration in the UK, using Nature as infrastructure to create resilient companies, cities, and communities that thrive."

Fiduciary Duty:

We discussed the outdated definition of fiduciary duty, urging trustees to consider the long-term impacts of systemic risks and seek legal clarity on their responsibilities. Sanjay Joshi added, "Fiduciary duties should consider immediate financial returns and long-term sustainability. Trustees must balance these aspects to ensure the security of pension funds."

Policy Advocacy and Stewardship:

Pension schemes can influence broader systemic changes through policy advocacy and stewardship. Collaboration with governments and other asset owners amplifies efforts to drive meaningful change.

Key Actions for Pension Schemes:

1. Engage with asset managers and set ambitious goals.
2. Leverage collective influence to mitigate systemic risks.
3. Advocate for regulatory changes to support sustainable investments.
4. Invest in Nature-based solutions for resilience.

We concluded the discussion with a consensus on the importance of addressing climate and Nature in investment strategies, emphasising the need for clear guidance on fiduciary duty, better governance models, strategic asset allocation frameworks, and government involvement to support these initiatives.

Thanks to Richard Giles and Pensions for Purpose Purpose for organising this excellent webinar. Let's continue working together to ensure our pension schemes are resilient and sustainable for future generations! 🌿💪

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