Investors have realised the power of pensions to save the world

While the power of small individual investors to affect change here is likely limited, institutional investors carry considerable clout.

A recent action taken by 27 major shareholders at Shell, including a number of European pension schemes, is one such case in point.

Earlier this year, these shareholders called on the company to bring its emissions reduction targets in line with the Paris Climate Agreement. Some of the investors, who represent almost 5pc of Shell’s total shareholding, include Amundi, Greater Manchester Pension Fund, Rathbones Group, Scottish Widows and the UK’s Pension Protection Fund.

The activist group Follow This ­coordinated the resolution on Shell to align its environmental targets with those of the Paris Climate Agreement.

Shell’s shareholders will be asked to support this resolution as an advisory vote at this year’s annual general meeting, expected to take place in London next month. Mark van Baal, founder of Follow This, believes that if passed, this resolution will give Shell a shareholder mandate to significantly cut its carbon footprint.

Speaking at the time the 27 investors agreed to back the resolution, Mr Van Baal said: “Large shareholders hold the key to tackling the climate crisis with their votes at shareholders’ meetings.

“Shell will only change if more shareholders vote for change.”

Time will tell whether or not Shell’s shareholders reject or accept the resolution, as well as the impact such a resolution, if passed, will have on climate change. However, regardless of the outcome, the case shows that there is an increased awareness amongst institutional investors, including pension funds, of their considerable influence.

By actively engaging with companies on ESG (Environmental and Social Governance) issues, pension fund managers can drive positive change, such as advocating for better climate policies or encouraging diversity and inclusion in boardrooms.

Pension funds that incorporate ESG principles into their investment decisions and actions can reap other benefits for both the funds and the companies they invest in alike.

Firstly, if done correctly, it can enhance the risk-return profile of a fund’s investment portfolio. Secondly, by evaluating environmental risks (such as exposure to fossil fuels), social risks (such as labour rights violations), and governance risks (such as weak board oversight), funds can potentially mitigate risks and generate positive returns in the long run.

Since the introduction of IORP II – a groundbreaking piece of legislation that sets minimum standards for the management and supervision of pension schemes – trustees of occupational pension schemes are obliged to consider ESG risks and include them in their investment decision-making process.

Considering ESG does not mean that trustees have to invest in ESG friendly funds – some trustees have taken the decision to focus solely on returns, while others have ESG at the centre of their strategy. With concerns about climate change, social inequality, and corporate governance on the rise, trustees are starting to pay more attention to the impact their money has on the world.

ESG integration in pension funds is rapidly gaining momentum as investors increasingly recognise the importance of sustainable investing and the potential long-term benefits it can offer. While significant challenges remain, the overall trend towards ESG in pension funds is a positive one and as time goes on, the money being saved into pensions should ultimately help create a greener and more sustainable world.

Eoin Hassett is director, head of ­Trustees Services at ITC Group