The Pensions and Lifetime Savings Association (PLSA) has called for a new pensions law to drop an explicit reference to climate risk in trustees’ duties, despite acknowledging that “climate change poses a substantial risk to the business models of companies in nearly every sector, and the stability of the financial system” – with “profound consequences for pension funds’ investments.”
The Association claims that singling out Environmental, Social and Governance (ESG) risks by name can create imbalance in decision-making.
ClientEarth co-published a report with the PLSA in 2017 to support trustees in integrating climate risk into investment decision-making.
ClientEarth finance lawyer Alice Garton said: “Major financial institutions and world experts recognise climate risk as the most significant financial risk to the economy – from the Bank of England to the World Economic Forum. This risk is only going to increase.
“We’re seeing business held more and more rigidly to account on climate risk across Europe. France has Article 173; Spain’s new climate law will demand climate risk assessments from corporations; and the UK’s Environmental Audit Committee has called for a new climate risk law if asset owners and companies are not reporting in line with global best practice standards by 2022.”
The PLSA says that singling out climate risk might lead trustees to prioritise it unduly over other important ESG risks. However, as already reflected in many investor strategies, it is the scale and systemic nature of the risks associated with climate change and the low carbon transition which set them apart from other ESG factors.
Garton added: “Human rights abuses and resource depletion are crucial ESG issues but what the PLSA seems to have overlooked is that a changing climate underpins and intensifies these risks. Social issues are inextricably linked to climate change.”
HSBC pension scheme chair Russell Picot has previously said that financially material climate risk “is present in every investment portfolio I can think of.”
Garton concluded: “Climate change must be on trustees’ agendas – too many pension professionals are still worryingly under-informed about the pressing portfolio risks it poses. The recent proposals from the Department of Work and Pensions are a crucial step in making that happen and not a moment too soon. It would be hugely irresponsible to row back on this important development.”
Alice Garton is an Australian-qualified lawyer and Head of Climate at ClientEarth.