Fresh climate competency guide for investment consultants

Investment consultants face new climate competency standards

Pension scheme trustees can now assess their investment consultants’ climate expertise using an updated framework from the Investment Consultants Sustainability Working Group. The guide sets out specific criteria for evaluating how well consultants understand climate risks and integrate them into pension investment advice.

The framework comes from a collaboration of 17 UK investment consulting firms. These companies formed the working group in September 2020 to raise standards across the industry. Their aim was to accelerate sustainable investment practices through shared initiatives.

Climate expertise has become a non-negotiable skill for investment consultants. Trustees need advisers who can navigate climate-related financial risks, regulatory requirements, and net zero commitments. Consequently, this guide provides a practical assessment method that trustees can apply when reviewing their consultants’ capabilities.

Ian Gamon from LCP and the working group’s Regulation team explained the urgency: “Climate change is fast becoming the defining issue of our time and trustees of pension schemes need to know their advisers are on the front-foot with this issue.”

How the competency framework was developed

The guide builds on recommendations from the Pensions Climate Risk Industry Group consultation in 2020. That exercise urged trustees to require investment consultants and asset managers to demonstrate climate competence. The framework responds directly to those recommendations.

Several organizations contributed to the development process. ShareAction, The Pensions Regulator, and the Principles for Responsible Investment provided input. Their involvement ensured the framework aligned with regulatory expectations and industry standards.

The original guide launched in January 2021. It established “positive” and “best practice” indicators across five competency themes. Member firms have continued to update their practices since then, showing how the framework drives ongoing improvement.

Meanwhile, regulatory pressures have intensified. The Taskforce on Climate-related Financial Disclosures requirements now apply to many UK pension schemes. Net zero commitments have become common. As a result, trustees need clear criteria for assessing whether their consultants can meet these demands.

The five themes that define climate competency

The framework evaluates consultants across five core areas. Each theme includes specific indicators that separate adequate performance from best practice. Trustees can use these criteria to structure their assessments.

First, firmwide climate expertise and commitment looks at organizational structures. Best practice firms have clear governance arrangements for climate oversight. They typically hold signatory status with the UN Principles for Responsible Investment. From mid-2021 onwards, UK Stewardship Code signatory status became another key indicator. These firms also employ dedicated climate specialists.

Second, individual consultant climate expertise examines the capabilities of the people giving advice. Consultants should demonstrate they can assess climate risks and opportunities across different asset classes. They need to understand TCFD recommendations thoroughly. Moreover, they should educate clients about climate impacts on investment portfolios.

Third, tools and software examines the technical capabilities firms offer. Best practice includes scenario analysis that covers both assets and liabilities. Consultants should have climate risk monitoring tools integrated into their standard advice processes. They need systems that support clients pursuing net zero targets.

Fourth, thought leadership and policy advocacy looks beyond client work. Leading firms take public positions on climate issues. They advocate for orderly transition scenarios. This demonstrates commitment beyond commercial interests.

Fifth, assessment of investment managers and engagement examines how consultants evaluate the asset managers they recommend. Climate factors should integrate into manager ratings. Consultants should encourage asset managers to become Stewardship Code signatories. Some firms exclude funds that fail to meet sustainability criteria.

Recent developments and firm-level progress

Member firms have continued developing their practices since the original guide launched. LCP, one of the participating consultancies, achieved operational carbon neutrality in April 2021. They became a signatory to the Net Zero Investment Consultants Initiative. Furthermore, they integrated climate advice into all their services.

These firms have worked with major UK pension schemes on practical implementation. Projects include TCFD reporting, net zero alignment, and scenario analysis. This work demonstrates how the framework translates into actual consulting services.

The guide remains a cornerstone resource for the working group. It sits alongside other tools like the Derivatives Emissions Reporting Guide. Member firms continue to map their practices to the framework, showing their current capabilities against the established criteria.

The Pensions Regulator maintains scrutiny over how schemes address climate risks. TCFD reporting mandates now apply to large schemes. Consequently, trustees face regulatory expectations that their advisers have appropriate climate expertise. This guide helps trustees demonstrate due diligence in selecting and monitoring consultants.

What this means for pension schemes and their advisers

Pension scheme trustees carry fiduciary duties that now explicitly include climate risk. They must understand how physical risks, such as extreme weather events, might affect investments. They also need to grasp transition risks as the economy shifts away from fossil fuels. Investment consultants play a central role in helping trustees navigate these issues.

The framework changes the dynamic between trustees and consultants. Previously, trustees had limited tools for assessing climate competency. They often relied on general credentials or reputation. Now they have specific criteria for evaluation. This creates accountability.

For investment consultants, the framework sets clear performance expectations. Firms can use it to identify gaps in their capabilities. They can demonstrate their expertise to prospective and existing clients. Consultants who meet best practice standards gain a competitive advantage in tender processes.

Asset managers also feel the effects indirectly. When consultants integrate climate factors into their manager ratings, asset managers face stronger incentives to improve their own climate practices. This cascading effect could raise standards across the investment chain.

Supply chain impacts extend further. Pension schemes that achieve net zero alignment need their underlying investments to follow suit. This means pressure flows from trustees to consultants, from consultants to asset managers, and from asset managers to the companies in which they invest. Each link in this chain needs climate competency.

Tender processes for investment consulting services increasingly include climate criteria. Schemes seeking compliance support for ESG reporting expect consultants to demonstrate specific capabilities. Those without credible evidence of climate expertise risk losing business. Therefore, the commercial case for meeting the framework’s standards becomes compelling.

Essential information for trustees evaluating consultants

• The Investment Consultants Sustainability Working Group comprises 17 UK investment consulting firms collaborating to raise industry standards on sustainable investment practices since September 2020.
• The climate competency guide provides structured assessment criteria across five themes: firmwide commitment, individual expertise, tools and software, thought leadership, and manager assessment practices.
• Trustees can use the framework to evaluate whether their investment consultants have appropriate climate expertise to address TCFD requirements, net zero commitments, and fiduciary duties related to climate risk.
• Best practice indicators include clear governance for climate oversight, dedicated climate specialists, scenario analysis capabilities, and integration of climate factors into investment manager ratings.
• The framework aligns with recommendations from the Pensions Climate Risk Industry Group and was developed with input from ShareAction, The Pensions Regulator, and the Principles for Responsible Investment.
• Investment consultants should demonstrate they understand both physical risks from climate change and transition risks from the shift to a low-carbon economy across different asset classes.
• Member firms have shown practical application through work with major UK pension schemes on TCFD implementation, net zero alignment, and scenario analysis since the framework’s launch in January 2021.

Climate expertise becomes a commercial requirement

The competency framework reflects a fundamental shift in the investment consulting profession. Climate expertise has moved from a specialist niche to a core requirement. Trustees increasingly view climate competency as essential due diligence rather than an optional consideration.

This shift creates both challenges and opportunities for consulting firms. Smaller firms may struggle to develop the full range of capabilities the framework describes. They might lack resources for dedicated climate specialists or sophisticated scenario analysis tools. However, they could partner with specialist providers or focus on specific aspects of climate advice where they can demonstrate genuine expertise.

Larger firms have invested significantly in climate capabilities. They have hired climate scientists, developed proprietary tools, and built teams focused on sustainable investment. These investments position them well against the framework’s criteria. Nevertheless, they must ensure climate expertise spreads beyond specialist teams into day-to-day consulting relationships.

Trustee education remains crucial for the framework’s success. Some trustee boards have limited climate knowledge themselves. They may find it difficult to assess consultant competency without first building their own understanding. Resources like the SBS Academy training programs can help trustees develop the baseline knowledge needed to ask informed questions.

Regulatory expectations continue to evolve. The Pensions Regulator has signaled that climate governance will remain a supervisory priority. Schemes that cannot demonstrate their consultants have appropriate climate expertise may face regulatory scrutiny. This creates a compliance incentive beyond the commercial and fiduciary drivers.

The UK’s target to reach net zero emissions by 2050 means climate considerations will intensify over time. Pension schemes have long investment horizons that span decades. Their portfolios will experience the physical impacts of climate change and the economic transformation required to limit warming. Consequently, trustees need consultants who can guide them through this transition with confidence and expertise.

Where to find detailed guidance and resources

The Investment Consultants Sustainability Working Group maintains the climate competency framework on their website. Trustees can access the full guide, which includes detailed descriptions of positive and best practice indicators for each theme. This resource provides the foundation for assessing consultant capabilities.

The Pensions Regulator publishes guidance on climate-related governance and reporting for pension schemes. Their materials explain trustee responsibilities under TCFD requirements. Trustees can reference The Pensions Regulator’s climate guidance to understand the regulatory context for climate competency expectations.

ShareAction offers resources on sustainable pensions and investment practices. They have contributed to the development of climate competency standards across the industry. Their research and toolkits help trustees understand best practice in climate risk management.

The Principles for Responsible Investment provides frameworks for integrating environmental, social, and governance factors into investment decisions. Their guidance on climate reporting and scenario analysis supports trustees and consultants implementing net zero programs and carbon reporting requirements.

Professional bodies like the Pensions and Lifetime Savings Association offer training and guidance on climate issues for pension schemes. Their resources help trustees build the knowledge needed to evaluate consultant competency effectively. Additionally, organizations like the Carbon Trust provide technical guidance on carbon measurement and reduction strategies relevant to investment portfolios.