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ClientEarth Communications

2nd December 2016

Climate finance

Pension trustees could face legal challenge for ignoring climate risk – leading QC confirms

Two leading UK barristers, including pensions expert Keith Bryant QC, have confirmed that pension fund trustees who fail to consider climate risk could be exposing themselves to legal challenge.

A new legal opinion, the first of its kind in the UK, has been welcomed by environmental lawyers ClientEarth as a key step towards protecting pension savers’ money from climate risk and driving private finance towards low-carbon investment.

The opinion concludes that where climate risks carry material financial implications for fund performance, trustees must take those risks into account in investment decisions. Its authors state that this is “beyond reasonable argument” and that failing to do this “would not be a proper exercise of [trustees’] powers.”

ClientEarth senior corporate lawyer Alice Garton said: “This opinion clarifies beyond doubt that pension fund trustees are legally required to take climate risk into account where it could present financial risks to the fund’s investments. There is now abundant evidence to demonstrate that climate change presents major financial risks to investors as the world transitions to a low-carbon future in line with the Paris Agreement. Pension fund trustees can no longer legally ignore this issue.

“The opinion also makes the vitally important point that if the issue of climate risk is sensibly raised with trustees (for example by pension fund members), the trustees cannot simply refuse to think about it. They must grapple with the issue and at the very least consider whether it could be financially material.”

The opinion stresses that material financial implications in this context does not mean that climate risk would necessarily have an immediate impact on investment return – it may give rise to longer term financial consequences.

The Pensions Regulator pointed out in April that the long-term nature of pension schemes mean they are exposed to longer-term financial risks – such as climate change – which could be “financially significant, both over the short and longer term.”

The opinion references this guidance, and recommendations issued this year by the Law Commission, which the UK government failed to adopt.

Attention was drawn earlier this year to the risky nature of fossil fuel investments made by council pension funds, putting £14bn of savings at risk. UK parliamentary pension fund trustees are facing accusations from leading MPs for refusing to reveal the extent of their fossil fuel investments. Last week, a new EU law, the IORP II Directive, confirmed that pension funds must assess environmental, social and governance (ESG) factors, including climate risk.

This year, pension fund members have become more active than ever in holding trustees and fund managers to account on climate risk. ClientEarth’s Company and Financial team is currently analysing pension funds’ responses to members’ letters on the subject, with a view to considering legal challenge if appropriate.