Pension scheme trustees must consider the effects of climate risk across their portfolio, ClientEarth has warned.

ClientEarth’s Risky Business series launched today, with two reports aimed at trustees, investment consultants and actuaries advising defined benefit (DB) pension schemes, has highlighted the growing impact of climate risk on investment decisions.

The series explained that as climate risk is projected to have economy-wide implications over coming years and decades, it must be considered as a portfolio-wide strategic issue.

“This means that pension scheme trustees may not be able to discharge all legal duties for managing climate risk simply by delegating management of that risk to external managers, who only manage a proportion of the portfolio, often over relatively short time periods,” ClientEarth said.

Reference has also been made to The Pensions Regulator’s Code of Practice on Funding DB, which stipulates that these risks must be addressed across three separate strands – investment, funding and employer covenant.

“Climate risk may have implications for all three. However it is the investment strand that will be most relevant for investment consultants,” ClientEarth noted.

The report comments that there is now an “emerging consensus” that trustees “must, at the very least”, consider whether climate risk will have notable financial effects on their scheme. If climate risk does make an impact, trustees are legally required to address it, ClientEarth explained.

Furthermore, it was suggested that depending on the particular structure of the scheme, climate risk should be considered when setting investment beliefs and preparing a statement of investment principles, determining strategic asset allocation, selecting, mandating and monitoring the activities of investment managers and undertaking or directing stewardship activities.

“When providing advice to pension scheme trustees, investment consultants must understand their clients’ legal duties and provide their advice accordingly. In order to discharge their own legal duties, investment consultants should have a clear understanding of the implications of climate risk for the legal duties of trustees.”

To further assist trustees, the reports discuss how professional advisers to DB schemes should be addressing climate change and its associated risks when advising their clients.

ClientEarth lawyer and lead author Daniel Wiseman said: “Finally, we have a consensus that pension fund trustees have legal duties to consider and manage climate change risks. But we still see a gap in the advice they are getting from highly influential advisers, such as scheme actuaries and investment consultants. This is delaying effective action and proper risk management across the sector.

“Climate risk is present throughout the investment chain and so too is the responsibility to monitor and manage it. We hope that greater awareness of these legal duties will help protect professional advisers, trustees and the schemes they serve, from loss and liability arising from climate change risk.”

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