Pension funds need not rely on equities as their only engagement tool in the battle to achieve net zero.
So said Gillian de Candole, portfolio manager at Lothian Pension Fund, in a session on targeting net zero at the Pensions and Lifetime Savings Association’s investment conference.
“It’s worth reiterating that real world impact comes mainly from how we invest in primary markets,” said de Candole.
While there’s a lot of talk about engagement in equities and whether funds should engage or divest, bond investors have “an awful lot of power” when companies come back looking for new capital.
“We have a policy of ‘engage our equities, deny our debt’,” says de Candole. “It’s still a fairly uncommon policy, because it’s quite hard to implement.”
The difficulty is a lack of products that can help investors deny, but green bonds and sustainability linked bonds offer options, though they present their own challenges in terms of measurement and reporting, said de Candole.
Some of the practicalities of debt denial will depend on corporates or the industry, said de Candole. Are they covered by schemes such as the transition pathway initiative, which looks at their alignment? Have they set their own climate strategies or targets? Can you have confidence that they are working towards alignment, even if they’re not aligned now?
“It’s hard to put specific KPIs on, it’s much more nuanced, and I think that is where the challenge comes.”
Engagement in fixed income won’t become as commonplace as through equities, but de Candole says that if investors indicate demand for such products, then asset managers start designing the products that climate aware investors can then invest in.
“We hope to get some sort of transition that way,” said de Candole. “But it’s about thinking about that real world impact, rather than just beautifying your portfolio to reduce the backwards looking emissions, as opposed to where the future is going.”