Pension trustees must consider investment climate change risks

Although scheme trustees are not explicitly required by law to consider climate change risk, it is becoming increasingly apparent that climate change issues may materially prejudice investment returns. Trustees should therefore be prepared to manage climate change risk through their investment strategy, strategic asset allocation, investment manager selection process and stewardship activities according to the report, by Pinsent Masons, the law firm behind Out-Law.com, and the University of Leeds.

The report aims to clarify how trustees can, and should, consider climate change as part of their investment strategy in an appropriate and proportionate way, despite the lack of a coordinated approach on how these factors should be taken into account.

"The lack of a standardised approach to climate risk management means that many pension scheme trustees are unclear whether and how to consider climate change risks," said Carolyn Saunders, Head of Pensions and Long-Term Savings at Pinsent Masons. "However, pension scheme trustees have a fiduciary duty to take into account factors which present a material threat to the financial performance of their fund."

"Clearly, there is a potential for climate change to impact negatively on investment returns; so by incorporating climate change risk assessment into their investment strategy, strategic asset allocation, the selection and monitoring of fund managers and/or their stewardship activities, trustees can start to mitigate the risks this poses. Our report supports trustees to begin engaging proactively with the investment chain."

Pension scheme trustees have a duty to take account of all relevant considerations when making their investment decisions. Earlier this year, the House of Commons Environmental Audit Committee suggested that some trustees misunderstood the nature of their fiduciary duties as a need to "maximise short-term returns", an approach which could result in them underestimating longer-term risks.

The committee, which has written to the UK's top 25 pension funds to ask them how they manage the risks that climate change poses to pension savings, warned that insurance firms were likely to be hit by increasing claims related to extreme weather. Climate change also directly impacts on the value of some types of investment, for example in energy companies with a particular focus on fossil fuel generation.

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