Pension fund investors must stay vigilant as Brexit threatens to draw attention away from climate risk.
That was the warning from legal expert David Hertzell, at a pensions and climate legal conference hosted by ClientEarth and ShareAction this week.
The event, “Clarifying legal duties: the implications for pensions and climate risk”, was held at Sacker & Partners LLP in London. Notable speakers included Hertzell, former Law Commissioner for Commercial and Common Law and Pensions Minister Baroness Altmann.
The event marked the passing of two years since the release of the Law Commission’s landmark review “Fiduciary duties of investment intermediaries”, which recommended the government clarify trustees’ duties to consider long-term, systemic risks like climate change.
The government did not carry this advice through – something Hertzell branded a “missed opportunity”.
At the event, experts discussed the progress made since the review, but highlighted areas where clarity is still lacking. Many schemes, particularly those smaller, are still failing to take material financial issues like climate change into account.
Hertzell said: “Defined benefit pension schemes are a cottage industry and trustees will continue to rely on advice they receive from investment managers for better or worse. I would be surprised if many trustees of small schemes were well aware of our recommendations or at least felt in a position to do much about them.”
What do EU regulations mean for UK investors?
EU policymakers have recently agreed a European law, the IORP II Directive, which requires pension funds to consider risks related to climate change (such as stranded assets). When it comes into effect, it will be the first time a European law has regulated this kind of risk, reflecting a sea change in the investment world.
But given uncertainty as to the future of EU directives in the UK, it is even more important that clarity is achieved in domestic law.
Hertzell voiced concerns about the implications of June’s EU referendum for the pensions industry, saying:
“In the short-term I think it is a fair assumption that trustees and indeed all involved in the investment chain are going to be much more concerned about volatility and economic issues than they will be about long-term risks such as climate change. That is unfortunate.”
ClientEarth CEO James Thornton said: “Gone are the days when pension funds can afford to ignore climate change. If it is raised with trustees as posing material financial risk and they refuse to consider it, then we think this would not be a proper exercise of their powers.”
Catherine Howarth, Chief Executive of ShareAction, said: “Current regulations in the UK serve as a barrier to the consideration of financially material issues like climate risk. Trustees must know they have a mandate to invest with climate risk in mind. In Europe, the law is being strengthened in this area. UK legislators must catch up in order to protect savers in this country.”