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Pension trustees told to factor in climate change risk


Pension trustees are obliged to take into account climate change risk when making investment decisions, a pensions expert has said.

Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, was commenting after a UK parliamentary committee announced that it had written to the UK's top 25 pension funds to ask them "how they manage the risks that climate change poses to pension savings". The funds manage assets that are collectively worth more than £550 billion.

The Bank of England has suggested that pension trustees that fail to consider climate change risks may be in breach of their fiduciary duty to act in the best interests of their beneficiaries, the Environmental Audit Committee has said.

According to evidence submitted to the Committee's 'green finance' inquiry by the Department of Work and Pensions (DWP), however, recent research has suggested that there is "a lack of attention and outright misunderstanding" among many pension trustees regarding the extent to which they must consider environmental factors when making investment decisions.

Saunders said: "Trustees should be taking account of climate change risk where this could have a material impact on investment performance. And yet, many trustees are unclear whether and how to consider climate risk and can feel at a loss as to how to approach the issues."

"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," she said.

The Committee said that some pension trustees sometimes mistake their fiduciary duty as a need to "maximise short-term returns". However, such an approach "leads to the neglect of longer-term considerations – including environmental sustainability and climate change-related risks and opportunities", it said.

Chair of the Environmental Audit Committee Mary Creagh said: "Climate change means insurance firms will be hit with increasing claims related to extreme weather. Fossil fuel companies could lose value as the world implements the Paris Agreement on climate change to keep to below 2°C. Energy companies that do not make a timely low-carbon transition risk being left behind. We want to know what pension funds are doing to safeguard people’s pensions from the financial risks of climate change."

"The climate change risks of tomorrow should be considered by pension funds today. A young person auto-enrolled on a pension today may be 45 years away from retirement. Over that timescale these climate change risks will inevitably grow. We are examining whether pension funds are starting to take these risks into account in their financial decision making," she said.

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