As gilts play an "increasingly large role" in defined benefit (DB) portfolios, LCP has urged liability-driven investment (LDI) managers to influence government climate policy to protect members' pensions.

The firm said that LDI managers, as major investors in UK government debt, should engage with the UK government about addressing climate risk, suggesting that DB pension schemes, which often have large allocations to LDI, therefore, have a “key role to play”.

However, LCP said that climate change cannot be addressed by investors and companies alone, arguing that government action is also needed.

The consultancy also suggested that trustees should encourage their managers to articulate a transparent view of what they want to see from climate policy and develop a more robust approach to climate policy engagement.

LCP assessed five major LDI managers and found there was more they could do in these areas.

In particular, the analysis found that all five firms were liaising with a range of UK government and regulatory bodies on climate policy, and have dedicated resources in this area, to varying degrees.

However, the research also found that LDI managers’ strategies and governance frameworks relating to climate policy engagement currently tend to be quite rudimentary and not disclosed publicly.

The firm noted that generally, the managers have been “reluctant” to comment on governments’ net-zero plans as they are unwilling to be seen as taking a “political side”.

However, LCP argued that asset managers have a fiduciary duty to serve their clients’ best interests, including mitigating risks they are exposed to, such as climate change.

LCP explained that conducting an analytical assessment of government policies to reduce emissions was in line with this duty. 

Commenting on the analysis, LCP consultant, Julian Thakar, said: “There has traditionally been a misconception that gilt stewardship is not possible.

“However, it has the potential to play a significant role in addressing the systemic risks that our clients are exposed to, including climate change.

“It’s really important that schemes with LDI mandates engage with their managers to encourage improvements in their climate policy engagement in the areas we have identified.”

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