Top UK pension funds put on notice over climate risk

Pension schemes are at an increasing risk of litigation if trustees fail to develop their approach to climate risk in line with improving data and market practices, lawyers have warned some of the UK’s largest pension funds.

ClientEarth’s climate finance lawyers have written to the trustees of 14 pension schemes already in the spotlight after the House of Commons’ Environmental Audit Committee (EAC)’s recent green finance inquiry highlighted a poor understanding of climate risk among some of the UK’s largest pension schemes.

The move comes as ClientEarth publishes two reports from consultants which demonstrate that the evidence on financial risk is fast stacking up and global standards on responding to climate risk are becoming established.

The letters ask trustees to make a public statement to members making clear what steps they are taking on climate risk – and puts them on notice that legal action by scheme members could follow if they fail to take these risks seriously.

Growing pressure on pension schemes

A member of an Australian superannuation fund has recently brought the first climate change claim of its kind against his fund due to a lack of disclosure on climate risk policies. ClientEarth has warned that UK pension schemes should take note that the threat of litigation for failure to disclose and mitigate this type of investment risk may also become a possibility in the UK.

The EAC wrote to the 25 largest UK schemes in February to ask whether they were considering the impacts of climate risk. While some leading schemes are taking positive action to identify and manage climate related risk earning them the label “more engaged” by the EAC, the majority of the 25 schemes failed to show that they understood or had properly considered climate risk.

ClientEarth lawyer Joanne Etherton said: “As some of the biggest pension schemes in the UK, these schemes represent the retirement income of a large number of people, making it crucial that they step up their actions on protecting and future-proofing members’ pensions.

“Trustees’ legal duties are not static and a court would look to the evidence available and how their peers are responding in determining whether they are in breach – in short, legal duties on climate risk are evolving.

“The EAC raised climate risk as a key financial issue with some of the UK’s biggest schemes and some of the responses showed a woeful level of understanding and awareness, suggesting that trustees are still not clear on what is legally required of them.

“We are now putting these schemes on notice of the available evidence and setting out the standard that they should be looking to meet as they develop their climate policies, as well as the risk for failing to do so.”

The two reports published today by ClientEarth focus on the financial risks posed to pension funds by climate change and how the market is reacting to these risks.

Sustineri findings

Research conducted by consultancy firm Sustineri for one of the reports, based on the publicly available information produced by asset owners representing around 10% of global assets under management, shows that:

• Two thirds (67%) of asset owners covered by the report have divestment policies in place relating to either high-emitting companies or companies that have not been responsive to engagement efforts
• Private pension schemes tend to lag behind public pension schemes and sovereign wealth funds
• Asset owners are starting to focus on long-term risks from climate change but may still be neglecting to consider the short and medium-term risks arising from climate change
• Greater focus is needed on assessing climate risk for asset classes other than equities – only 3% of asset owners surveyed are looking across their whole portfolio with half of asset owners limiting carbon footprinting to public equities
• The majority (83%) of asset owners publish metrics relating to engagement with investee companies