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ClientEarth Communications

10th December 2019

Climate
Climate finance
UK

Pensions savers are holding funds’ feet to the fire on climate

At first, climate change and saving for a pension may seem like two entirely separate issues. However, the two are inextricably linked.

The financial impacts of climate change on the money we save are clear: investment returns will suffer if extreme weather, drought or changes in consumer preference hit them hard. Companies that fail to deal with those risks are unlikely to be attractive for pension investors.

As fears about climate change intensify, people are increasingly demanding more transparency from their pension funds. According to our recent survey, 55% of Britons expect their pension to avoid investing in fossil fuel projects that contribute to climate change.

Crucially, those making the investment decisions, are legally bound to consider climate change when assessing the material risks to those investments.

That’s why pension funds should not only take into account the risks that climate change poses to their members’ savings, but also disclose how they are managing these risks.

Climate change poses significant financial risks to pension funds and members have legitimate concerns about how their own scheme is dealing with climate risk.

Challenging Shell’s pension fund

In the absence of responsible behaviour from schemes, people taking action to hold their schemes to account is crucial.

We have been helping Christopher Harwood, a member of the Shell Contributory Pension Fund (SCPF) in his efforts to get proof that the fund is adequately managing its climate-related risk.

Mr Harwood worked for Shell in the 1980s and 1990s and is entitled to a pension from the SCPF when he retires. In October 2018, we supported him in making a complaint to the Pensions Ombudsman, the institution in charge of settling disputes and complaints about pensions.

The move came after two years of unsatisfactory answers to his requests for proof the fund is acting on the threat that climate change poses to its investments and potentially to members’ pensions. The fund is doubly exposed to climate risk, as it not only holds fossil fuel investments, but is sponsored by an oil and gas company.

This was not the first time a pension fund member requested more transparency from a fund. Earlier in 2018, Australian saver Mark McVeigh took his own action, filing a suit against the Retail Employees Superannuation Trust (REST) for failing to disclose information on the effect of climate change on his investments and how it is addressing the issue.

The Pensions Ombudsman has decided not to require the SCPF to release information to Mr Harwood about how it deals with climate-related risks. At the time of writing, it had still not made that decision public. But despite the disappointing decision, the SCPF has shown signs of improving its climate risk management.

Setback or success?

At the time of the complaint, none of the scheme’s policies provided to Mr Harwood included even a mention of climate change. Shortly after the complaint was filed with the Ombudsman, the SCPF updated its Statement of Investment Principles (SIP), a written document statement governing decisions about investments. It now states that the SCPF incorporates financial risks relating to climate change into its scenario analysis for asset liability modelling, suggesting that the scheme might finally be taking the risks associated with climate change seriously.

We believe this had a lot to do with Mr Harwood’s legal challenge and shows the power the law has to ensure major financial players are thinking about, and managing, climate risk and opportunities.

A problematic process?

Our lawyers have serious concerns about the Ombudsman’s decision, in particular that the Ombudsman may have failed in its duties by not engaging with the content of Mr Harwood’s complaint. The decision states that Mr Harwood “did not provide any specific cases” to support his argument – whereas seven pages of case law and legal analysis had in fact been included in the complaint.

We are calling on the Pensions Ombudsman to carry out a review of its internal processes to ensure that decisions are reached on a proper consideration of all relevant documents.

Appealing a Pensions Ombudsman decision means going to the High Court, risking exposure to considerable costs in the process. Such an appeal will not be a practical option for many pension scheme members, and Mr Harwood will not be appealing the Ombudsman's ruling.

We remain committed to helping people engage with their pension funds on climate change. We’ll also keep reminding pension funds that they risk legal action if they fail to consider the effects of climate change on their portfolios.

With new requirements now introduced that SIPs must include “financially material considerations” including climate change, the spotlight will be on schemes who fail to adequately manage climate risks.

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