More than 80% of Local Government Pension Scheme (LGPS) funds made no mention of climate risk in their new investment strategies, according to analysis by ClientEarth and ShareAction. This is in spite of prior warning from industry, savers, and civil society over the significant impact climate change may have on pension fund portfolios.
Flagging undermanaged risk
ClientEarth and ShareAction submitted a referral to the Pensions Regulator (TPR) in February highlighting varying standards across the LGPS in how funds were assessing and managing climate risk in investment decision-making. The charities attributed this to a number of fundamental misconceptions held by numerous administering authorities about what the law requires of them.
TPR recently issued investment guidance explicitly referencing climate considerations. This guidance is applicable to administering authorities of LGPS funds.
Following the referral, LGPS funds were due to release ‘Investment Strategy Statements’ (ISS) by 1 April 2017 under new rules effective this year. Ahead of this deadline, ClientEarth and ShareAction wrote to each LGPS fund to enquire how they would incorporate climate risk in their ISS and ensure adequate protection for savers against the portfolio-level risks presented by climate change.
A consistent response to climate risk?
Just 12 of 76 LGPS funds that published an ISS specifically mentioned climate risk and only three mentioned reducing fossil fuel investment. The other LGPS funds have yet to make their ISS publicly available. The balance of leaders and laggards in LGPS funds reflects a similar disparity in private sector schemes.
According to ClientEarth and ShareAction, funds must address climate risk specifically in their investment strategies as climate change poses systemic risks likely to affect a fund’s whole portfolio.
ClientEarth CEO James Thornton said: “The physical and regulatory risks of climate change to investments are irrefutable. It is troubling that just 12 LGPS funds have addressed climate-related financial risk in their investment strategies.
“Pension funds owe their members an explanation of what’s being done to protect their savings. That goes for private and public pension schemes – those LGPS funds clearly falling behind should be looking to remedy this shortcoming swiftly.”
Catherine Howarth, CEO of non-profit responsible investment experts ShareAction, said: “While some LGPS funds are leading on taking the financial risks associated with climate change into account in their investment processes, many are on the back foot, operating under a number of misconceptions, including legal ones. This is not fair on pension holders. Members’ savings should be protected across the board from the very real and emergent risks of climate change.”
Investment Strategy Statements can be revised and administering authorities who have so far failed to pay heed to climate risk in theirs should be jumping to do so. ClientEarth and ShareAction will continue to monitor laggard funds and, where appropriate, further regulatory action may be taken.