ESG means different things to different people. For the Trustee, it’s about making your investments sustainable in the long-term, and that means managing risk and identifying opportunities.

If there are ESG issues that could have a negative effect on the value of members’ DC pension pots, the Trustee expects its investment managers to be mitigating those risks. And if there are opportunities for higher financial returns for members, the investment managers can explore them. The Trustee adopts this approach across all its DC funds, even if the fund name itself doesn’t specifically mention ESG factors.

Managing ESG risk in this way is all about financial value, which is in line with the Trustee’s fiduciary responsibility to manage the Scheme’s investments on behalf of the members. It’s not about ethical values or ethical investing – in other words, imposing a set of ethical values or beliefs upon a given investment process.

Net zero is short for net zero emissions of greenhouse gases, like carbon dioxide, that cause climate warming. Net zero emissions is when the amount of greenhouse gases being emitted into the atmosphere matches the amount being removed. So, there are zero emissions in total.

Many greenhouse gas emissions are created by human activities such as heating homes and travelling, as well as the way society produces and consumes everyday items like clothes, food and technology. So, to reach net zero, the world needs to change the way it produces and consumes. This is going to be challenging, but it’s becoming the goal for many governments and companies across the globe. As well as reducing emissions, the world will also need to actively remove greenhouse gases from the atmosphere.

In October 2021, the Trustee set out its plans to achieve net zero by 2050 or sooner, in line with the net zero goals of the Paris Agreement. These plans will underpin the Trustee’s approach to managing climate related ESG risks. You can read more about them in the Trustee’s commitment to net zero statement

ESG is important because an ESG issue could have the effect of changing the value of a member’s DC pension pot. For example, if the issue isn’t appropriately managed, the DC pension pot value could go down. However, if new investment opportunities are identified, such as investing in the production of renewable energy like wind farms, the DC pension pot value could go up. This matters for DC members in particular because the value of the investments relates directly to the value of a member’s DC pension pot.

ESG issues can affect any kind of investment. They can be specific to one particular company, such as an inappropriate board structure, or they can be a global concern, such as climate change. They all need managing, as best the investment managers can, to protect the value of the investments.

The Trustee particularly focuses on climate change because it’s a global issue that will affect the whole of the investment world. As such, it’s a systemic risk.

The Trustee has also prioritised managing climate change risk because science says that the world needs to act now. Current estimates indicate that the world is on course to reach an average global temperature that’s 4 degrees Celsius warmer than its pre-industrial level by the end of the century. This is significantly above the 1.5-degree Celsius target set by the UN as the maximum the world can reasonably tolerate.

As a result, there needs to be a global transition into a 1.5-degree Celsius world. This transition will threaten some industries and the companies within them. However, it will also open up new opportunities for companies that provide products and services to help achieve these global targets. This is why the Trustee views climate change as both a risk and an opportunity.