Pension fund investments face “severe risks” from climate change in both the short-term and long-term, according to the Pensions and Lifetime Savings Association.

New guidance published today, 6 December, by the PLSA and in partnership with ClientEarth, has stated that while climate change is commonly thought of as a long-term issue, potentially hitting global GDP by 50 per cent by 2100, there is also a serious risk to pension funds’ investments in the short term.

The Association referenced a recent report from Cambridge University, which found that in the event of a 2°C increase, portfolios with a similar makeup to many pension funds could suffer permanent losses of more than 25 per cent within five years after the shock is experienced.

In addition, senior figures from the Bank of England and The Pensions Regulator have warned of the threat to financial stability posed by climate change. The PLSA stewardship survey also found that 76 per cent of respondents agree that environment, social and governance (ESG) factors, such as climate change, can be material to investment performance.

Commenting, PLSA policy lead, stewardship and corporate governance Luke Hildyard said: “Climate change is not just an ethical issue for pension fund governance bodies, but a major threat to financial stability highlighted by numerous credible economic commentators and rigorous research. It is therefore imperative that boards and committees consider the potential impact that climate change will have on their investment portfolios.

“The PLSA was very encouraged by responses to our stewardship survey. Over 50 per cent of respondents told us that they planned to increase stewardship activity in the next year around areas such as climate change.”

The PLSA has updated its guidance to provide a framework for pension schemes to act on climate change. It recommends that funds should undertake a programme of measures to mitigate risks and take advantage of opportunities relating to climate change.

These include incorporating climate change expertise into trustee boards and other governance bodies; reviewing how current and prospective asset managers consider climate change as part of their investment decisions, and incorporating this into manager selection processes; instructing asset managers to engage with investee companies with regard to their plans to mitigate and adapt to climate change; and, reporting on their management of climate change-related risk to beneficiaries, using the reporting framework recommended by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD).

“This guide represents a substantive programme that pension funds can implement as part of these plans. We hope that it will help governance bodies and give confidence to beneficiaries that risks to their incomes in retirement deriving from climate change are being responsibly managed,” Hildyard added.

In addition, ClientEarth company and financial lawyer Natalie Shippen said: “Climate change requires consideration by governance bodies as a financial risk – and this is fortunately being recognised industrywide. But until now, a comprehensive ‘how-to’ for the day-to-day management of the issue has been lacking, meaning pensions professionals may be aware of their legal duties but feel ill-equipped to exercise them. The PLSA’s new guidance is a one-stop shop for trustees and professional advisers. It is a vital tool for the pensions industry as the physical impacts of climate change intensify and the energy transition gathers speed.”

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