PLSA AC 21: Legal clarification needed to 'embolden' trustees against climate risk

Industry experts have shared mixed views as to whether greater support is needed to "embolden" trustees to take action against climate change, with varied support for both an evolution of fiduciary duty and mandating for net zero amongst pension schemes.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Annual Conference 2021, ShareAction chief executive, Catherine Howarth, suggested there needs to be an "evolution" of fiduciary duty to allow bold investment from trustees.

She said: "Anyone seeking for pension certainly wants to get a really good return on investment, but if the investments made over the lifetime of a pension fund accumulation journey have contributed to things that destabilise the quality of life and wellbeing, and even raise costs in the future, then that member’s best interests haven't actually been optimally served.

“I think we do need an evolution of fiduciary obligations, so that we retain that old historic focus on best interests, but we update for the context we operate in where we’ve got a climate crisis, and we actually give trustees more latitude to shift away from what could be profitable investments in the short term, but which actually exacerbate the climate crisis."

Currently, she warned, pension schemes could be considering some investments are too risky due to the sector and covenant risk they could pose, but within the short term could be "very profitable".

“That leaves trustees in a quandary and I think we need the law in pensions to leave trustees with clarity and freedom to invest in ways that they believe will be in the best interests of members, including really enabling our portfolios to help decarbonise the real economy," she said.

“I'm very pleased to say that I feel there's really an exciting debate about that, that that's grounded in serving members for the future, but which looks at the context we operate in the 21st century risks and systemic challenges, notably climate change but actually biodiversity loss and other things are quite problematic as well.

"I'm of the view that we need a more enabling legal framework that gives trustees greater freedom to invest in a more bold way for the for the moment we live in."

Adding to this, however, Nest chief executive officer, Helen Dean, said that whilst she was "certainly not against more clarity to embolden trustees who may feel concerned about these things", the current definition has not presented a problem for Nest.

She said: "We don't see a conflict between our fiduciary duty and the way we invest, we see complete congruence between it and the point is we are long-term investors.

“We want to invest sustainably over the long term because we believe that will provide our members with better long-term assets. Therefore, it is our view that investing sustainably, we'll achieve that. So we think that what we're doing is in the best long-term financial interests of our members.

"The other thing I'd say about it is we have a mandate from our members and trustees are allowed to consider that. We survey [our members] every year and around 75 per cent of them will tell us that it matters massively to them that actually we invest sustainably.

"So with the financial interests and the mandate, I think we feel very confident with what we’re doing in the current arrangement, clarity though would be helpful.”

BT Pension Scheme chief executive officer, Morten Nilsson, agreed, clarifying however, that pension schemes ned to be "very careful" as the debate broadens out beyond climate change issues.

“We need to be very careful that pension schemes don’t try and overreach and to do everything and be everything for every key topic we have going, because that will be very difficult to defend," he said.

"But for climate change its very clear its such a big risk that it needs to be managed carefully and there are also quite a lot of opportunities, long-term good opportunities."

Mixed views were also heard in response to Make My Money Matter's recent call for the government to mandate net zero amongst pension schemes, as Howarth said that whilst this wouldn’t act as a “silver bullet”, she was “pretty supportive” of the idea.

“Mandating alignment with net zero would actually give everyone the clarity and guardrails they need to do what is sometimes very tricky transitions,” she said.

Morten agreed that this “might make it easier for pension schemes," stating that he "would be in favour of mandating”.

“In our case we were able to set our own goal of 2035 which is of course different from what the mandate probably would be and of course I encourage pension schemes to take the time to see what they might be able to achieve, but I think I would be in favour,” he added.

Dean, however, suggested that whilst this might help, there is “no substitute for engaged pension funds really doing it themselves”.

“The problem with mandates is you can get into a situation where people send all there time trying to get around them. So the buy-in of engagement is equally important”, she said.

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