This time last week Scotland was firmly in the grip of the so-called Beast from the East, with warmer than usual air at the North Pole bringing what many believe to be our heaviest snowfalls for 20 years.
Scientists speculate that these weather patterns will become more common as a result of man-made climate change, which is also believed to be behind other extreme weather events in the UK over recent years.
But many pension scheme trustees are unclear whether and how to consider climate change risks, and so trustees will often put the topic in the “too difficult” box.
The Law Commission’s 2014 report on the Fiduciary Duties of Investment Intermediaries concludes that trustees should take account of “non-financial factors”, including environmental aspects such as climate change, where these could have a material impact on investment performance. Also, it is well-known that trustees have a duty to take account of all relevant considerations when making decisions.
The potential for climate change to harm investment returns will be relevant to some schemes – so at the very least, this requires trustees to understand if there is a need to assess material impact and, if so, 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 change in circumstances where they should have done so.
Pinsent Masons this week published a special report, Managing Climate Risk in a Changing Environment, in collaboration with Leeds University, and which coincided with the PLSA Investment Conference at Edinburgh’s EICC.
The report is aimed at helping trustees understand better the legal and financial drivers for considering climate change. In particular, it outlines the practical steps that trustees can take to engage with climate risk in ways appropriate and proportionate for their respective schemes, and explores some of the barriers to climate risk-management as well as the potential solutions to these barriers.
A key theme of the report is that, while there is no express requirement in UK law for pension fund trustees to consider climate change risk, the potential for it to materially affect a fund means trustees have a fiduciary duty to consider whether it is a material threat to investment performance. Indeed, this is consistent with the line being taken by the cross-party Environmental Audit Committee, which this week wrote to the UK’s top 25 pension funds asking them what they are doing about managing climate risk.
The report also finds that while there is uncertainty about the way in which climate change risks will develop, there are techniques that trustees can use to help them assess these risks, which can be managed through investment strategy, strategic asset allocation, the selection and monitoring of fund managers, and active stewardship. In short, any board of trustees can take the steps needed to engage with this issue.
Pension funds can play an important role in the transition to a low-carbon economy as part of a collective effort of climate change mitigation. Trustees have the responsibility to consider and respond to the impact of environmental change if it represents a material risk to the financial performance of the fund. Starting the journey of climate risk management now can help a fund’s resilience towards future changes that the issue inevitably will bring, whether through a warming planet and its consequences, or because of global efforts to stop its effects.
Either way, the impact of climate change on investments will likely be felt sooner or later. Considering it should no longer be regarded just as a well-meant gesture by trustees, but rather as an important means of managing a fund’s long-term returns in the best interests of its members.
Carolyn Saunders, partner and head of pensions & long-term savings at legal firm Pinsent Masons.