UK's 25 largest pension schemes grilled over climate risk strategies

Written by Theo Andrew
05/03/18

The Environmental Audit Committee (EAC) has written to the UK’s 25 largest pension funds, in order to understand their investment strategies around environmental risks.

In a letter published today (5 March 2018), the Chair of the Environmental Committee, Mary Creagh, asked the pension funds, with combined assets of nearly £3trn, if they accepted the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures (TCFD), as part of its initiative into green finance.

It follows a response from the government, in which it accepted TCFD’s findings, but suggested there is still “widespread misunderstanding” among the industry about the financial risk of climate change to their client’s portfolios.

Speaking at the Association of Member Nominated Trustees Spring Conference 2018 last Wednesday (28 February 2018), HSBC Bank Pension Trust UK Limited chief investment officer, Mark Thompson, argued trustees' mind-sets are now more rooted in fiduciary responsibility and suggests The Pensions Regulator is growing in confidence around ESG factors.

Thompson said: “When I started seven or eight years ago that mind-set was the mind-set of my 13 trustees … environmental, social and governance (ESG) issues should be a major material factor in investment decision making.

“More recently TPR is actually getting more confident and are saying more about how it could and should start thinking about ESG risks, so from that point of view we are moving in the right direction.”

Furthermore, Creagh asks the pension schemes if they have considered the risks at board level, what actions they are planning to take in response to the risks and whether they are going to adopt the TCFD recommendations. The schemes have been given until the 28 March to respond.

The FSB taskforce published its findings on climate-related financial disclosures in June 2017, in which it suggested four recommendations around governance, strategy, risk management and metrics and targets for companies to give investors.

Pensions and Lifetime Savings Association (PLSA) policy lead for stewardship, Luke Hildyard, said: “Numerous credible commentators from institutions such as the Bank of England, Cambridge University and many leading financial services firms have highlighted the major economic impact of climate change and the serious long-term threat that it poses to pension funds' investments.

“It's definitely an issue that trustees should be making time to discuss and seeking advice on.”

The PLSA has written guidance on the issue in which it recommends bringing climate change expertise on the board and for funds to review how their current asset managers consider climate change.

ShareAction senior policy officer, Rachel Haworth, said: “ShareAction is delighted that the EAC is taking decisive action to assess how far pension funds are taking account of climate risk. It is high time that pension funds were held to account on how they manage this key risk.

“Surveys suggest that many pension funds are still failing to manage investment risks relating to sustainability. With nearly £3trn assets under management, it is crucial that UK pension schemes aim to invest in a way that is compatible with a below two-degree world: for the sake of both pension savers’ financial outcomes and the wider world they live in.”

Pinsent Masons head of pensions Carolyn Saunders, agrees and suggests many trustees simply do not understand how to approach the issue.

Saunders said: “At the very least, trustees should understand whether there is a need to assess material impact and who in the investment chain is making this assessment. Otherwise, trustees risk being in breach of their duties for failing to take account of climate risk in circumstances where they should have done so.”

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