Six stages to eliminate deforestation in investments - MMMM
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
There are six phases to ensure the investments pension funds make are deforestation free, according to campaign group Make My Money Matter.
These steps range from identifying where deforestation risks can be found in portfolios to implementation and engaging, according to an interactive guide published on Tuesday by MMMM, deforestation charity Global Canopy and systems change firm Systemiq.
A number of pension funds helped shaped the guide. Tony Burdon, chief executive of MMMM, said their inputs were included as he knows “pension funds have their capability challenged given all the demands on them”.
In an interview with mallowstreet, he said: “We call on them to sign up, to commit to remove deforestation from their portfolio. The guide will help them do that. We’d like them to do that by 2025 or as soon as possible thereafter.”
How soon could pension funds make a difference?
The guidance identified five stages plus an extra step pension funds could take to increase their activities to transition away from deforestation:
1. Mapping risk – the guidance recommends phase 1 should be started within three months of beginning the roadmap at the latest and expects this phase to be completed by mid-2022, or within nine months of beginning this roadmap.
2. Setting an effective policy and managing risk - the guidance recommends phase 2 should be completed by the end of 2022 or within 15 months of committing to the roadmap.
3. Monitoring and engagement – this phase is recommended to start at the end of 2022, particularly when engaging the highest-risk clients/holdings, or within at least 15 months of beginning the journey. The first cycle of monitoring and engaging of non-compliant holdings should be completed by 2023, or within two-and-a-half years of beginning the roadmap.
4. Disclosing – the guide advises that the first public reporting of progress on monitoring and engagement should be published by 2023, or within two-and-a-half years of committing to the roadmap, alongside publicly acknowledging deforestation, conversion and associated human rights risks. It also recommends publishing the results of pension funds' in-depth deforestation risk assessment.
5. Eliminating deforestation - it is recommended that phase 5 should be completed by 2025, or within four years of committing to the roadmap at the latest.
6. Going above and beyond - the guidance recommends that all financial institutions increase their nature and people-positive investments and activities.
The guidance starts off by mapping out the portfolio risk from deforestation.
“Once you understand that, you set out your policy and what you are going to do about it. Then you engage with those companies or financial institutions and monitor progress. Then you disclose, you are transparent - this is communicating. If you are transparent about where you are, it helps build momentum and pressure for change,” said Burdon.
He then explained pension funds could move to eliminating deforestation, “whether that’s through your engagement, or ultimately you may need to divest if companies are not going to change”.
Accountability requires communication
Burdon is aware some pension funds have committed to net zero but said they have not been transparent about the impact of their investments in the past, adding they had “been helping to drive climate change, which pension members didn’t know”.
He added: “Now they got this commitment to net zero. That should reassure members, but only if pension funds communicate, in a standard way, the progress they are making.”
He called on pension funds to disclose their progress and improve their communication strategy.
“Being transparent on what you are trying to do [for] your members is very important. It’s their money you’re managing. Having targets helps hold you to account for delivery,” he said.
Is deforestation currently part and parcel of pension investments?
Burdon urged savers to demand that their pension funds stop investing in high-risk companies such as those in the fossil fuel sector.
Earlier this year, MMMM produced a video featuring an unsuspecting pension fund member receiving an outsized parcel with a picture of a tree harvester, to make people aware their pension was causing deforestation.
Burdon said the British public would want their pension investments to do good. “If they knew their pension had a positive impact aligned with their values, that would be very powerful,” he said.
However, he acknowledged that a lack of financial literacy among the public is a problem as people are not aware how their pension is invested or even that it is invested.
“They don’t know the name of their pension fund. They don’t know it’s invested. They put it into a pension by their employer, and it’s just a painful extraction of money every month from their wage packet,” he said.
Is the government doing enough?
Earlier this year pensions minister Guy Opperman said he intended to discuss deforestation issues with UK pension funds.
Asked whether any progress has been made, a spokesperson for the Department for Work and Pensions told mallowstreet the UK was the first country in the world to require trustees of occupational pension schemes to identify, manage and report on the climate-related risks and opportunities within their portfolios, including deforestation.
These steps range from identifying where deforestation risks can be found in portfolios to implementation and engaging, according to an interactive guide published on Tuesday by MMMM, deforestation charity Global Canopy and systems change firm Systemiq.
A number of pension funds helped shaped the guide. Tony Burdon, chief executive of MMMM, said their inputs were included as he knows “pension funds have their capability challenged given all the demands on them”.
In an interview with mallowstreet, he said: “We call on them to sign up, to commit to remove deforestation from their portfolio. The guide will help them do that. We’d like them to do that by 2025 or as soon as possible thereafter.”
How soon could pension funds make a difference?
The guidance identified five stages plus an extra step pension funds could take to increase their activities to transition away from deforestation:
1. Mapping risk – the guidance recommends phase 1 should be started within three months of beginning the roadmap at the latest and expects this phase to be completed by mid-2022, or within nine months of beginning this roadmap.
2. Setting an effective policy and managing risk - the guidance recommends phase 2 should be completed by the end of 2022 or within 15 months of committing to the roadmap.
3. Monitoring and engagement – this phase is recommended to start at the end of 2022, particularly when engaging the highest-risk clients/holdings, or within at least 15 months of beginning the journey. The first cycle of monitoring and engaging of non-compliant holdings should be completed by 2023, or within two-and-a-half years of beginning the roadmap.
4. Disclosing – the guide advises that the first public reporting of progress on monitoring and engagement should be published by 2023, or within two-and-a-half years of committing to the roadmap, alongside publicly acknowledging deforestation, conversion and associated human rights risks. It also recommends publishing the results of pension funds' in-depth deforestation risk assessment.
5. Eliminating deforestation - it is recommended that phase 5 should be completed by 2025, or within four years of committing to the roadmap at the latest.
6. Going above and beyond - the guidance recommends that all financial institutions increase their nature and people-positive investments and activities.
The guidance starts off by mapping out the portfolio risk from deforestation.
“Once you understand that, you set out your policy and what you are going to do about it. Then you engage with those companies or financial institutions and monitor progress. Then you disclose, you are transparent - this is communicating. If you are transparent about where you are, it helps build momentum and pressure for change,” said Burdon.
He then explained pension funds could move to eliminating deforestation, “whether that’s through your engagement, or ultimately you may need to divest if companies are not going to change”.
Accountability requires communication
Burdon is aware some pension funds have committed to net zero but said they have not been transparent about the impact of their investments in the past, adding they had “been helping to drive climate change, which pension members didn’t know”.
He added: “Now they got this commitment to net zero. That should reassure members, but only if pension funds communicate, in a standard way, the progress they are making.”
He called on pension funds to disclose their progress and improve their communication strategy.
“Being transparent on what you are trying to do [for] your members is very important. It’s their money you’re managing. Having targets helps hold you to account for delivery,” he said.
Is deforestation currently part and parcel of pension investments?
Burdon urged savers to demand that their pension funds stop investing in high-risk companies such as those in the fossil fuel sector.
Earlier this year, MMMM produced a video featuring an unsuspecting pension fund member receiving an outsized parcel with a picture of a tree harvester, to make people aware their pension was causing deforestation.
Burdon said the British public would want their pension investments to do good. “If they knew their pension had a positive impact aligned with their values, that would be very powerful,” he said.
However, he acknowledged that a lack of financial literacy among the public is a problem as people are not aware how their pension is invested or even that it is invested.
“They don’t know the name of their pension fund. They don’t know it’s invested. They put it into a pension by their employer, and it’s just a painful extraction of money every month from their wage packet,” he said.
Is the government doing enough?
Earlier this year pensions minister Guy Opperman said he intended to discuss deforestation issues with UK pension funds.
Asked whether any progress has been made, a spokesperson for the Department for Work and Pensions told mallowstreet the UK was the first country in the world to require trustees of occupational pension schemes to identify, manage and report on the climate-related risks and opportunities within their portfolios, including deforestation.
The spokesperson added: “At COP26 we were pleased that several significant UK-based pension funds committed to transitioning their portfolios away from activities that are driving deforestation.
“That showed just how these measures are delivering a new level of accountability, with pension savers able to see the impact of their investments and better understand how risks are being considered and mitigated.”
What can be done to improve savers’ financial literacy?
