Pension schemes at risk of litigation over their approach to climate risk

Pension schemes are being warned they are at risk of legal action being taken against them if they fail to develop their approach to climate risk in line with improving data and market practices.

Finance lawyers at ClientEarth have written to the trustees of 14 pension schemes in the spotlight following the House of Commons’ Environmental Audit Committee (EAC)’s recent green finance inquiry, which highlighted a poor understanding of climate risk among some of the UK’s largest pension schemes.

The move comes as ClientEarth publishes two reports from consultants which demonstrate that the evidence on financial risk is fast stacking up and global standards on responding to climate risk becoming established.

The letters ask trustees to make a public statement to members making clear what steps they are taking on climate risk - and puts them on notice that legal action by scheme members could follow if they fail to take these risks seriously.

A member of an Australian superannuation fund has recently brought the first climate change claim of its kind against his fund due to a lack of disclosure on climate risk policies. ClientEarth has warned that UK pension schemes should take note that the threat of litigation for failure to disclose and mitigate this type of investment risk may also become a possibility in the UK.

The EAC wrote to the 25 largest UK schemes in February to ask whether they were considering the impacts of climate risk. While some leading schemes are taking positive action to identify and manage climate-related risk earning them the label “more engaged” by the EAC, the majority of the 25 schemes failed to show that they understood or had properly considered climate risk.

Commenting, ClientEarth lawyer Joanne Etherton said: “As some of the biggest pension schemes in the UK, these schemes represent the retirement income of a large number of people, making it crucial that they step up their actions on protecting and future-proofing members’ pensions.”

“Trustees’ legal duties are not static and a court would look to the evidence available and how their peers are responding in determining whether they are in breach – in short, legal duties on climate risk are evolving.

“The EAC raised climate risk as a key financial issue with some of the UK’s biggest schemes and some of the responses showed a woeful level of understanding and awareness, suggesting that trustees are still not clear on what is legally required of them.

“We are now putting these schemes on notice of the available evidence and setting out the standard that they should be looking to meet as they develop their climate policies, as well as the risk for failing to do so.”

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