Press release: 20 December 2023
Fossil fuel bond failure leaves UK's largest pension funds open to legal risk
Many of the UK’s biggest pension providers are failing to use a critical financial lever in their engagement with fossil fuel companies and are opening the door to legal risk, environmental lawyers warn.
ClientEarth has written to the UK’s 12 largest pension funds in the UK to say that - despite some meaningful shareholder engagement - funds have yet to focus on their bond investments, which are a much bigger yet lesser-known source of fossil fuel financing.
Bonds are fixed-term loans investors provide to either governments or companies and they underpin the financing of fossil fuels. 50 percent of fossil fuel financing comes from corporate bonds, according to the Toxic Bonds Initiative, and bonds account for the largest source of financing for coal in China and India. [1]
Existing legal duties require pension schemes to protect their beneficiaries from financial risk, with climate change posing an existential threat to the sector. [2]
By failing to use these levers funds are exposing themselves to legal risk, lawyers said.
ClientEarth lawyer Catriona Glascott said:
“Bonds are one of the main ways fossil fuel companies finance their expansion and pension funds investing in them run the risk of breaching legal duties.
“These funds have an enormous opportunity before them: by attaching climate terms to bonds, they can help turn the tide of the energy transition and reduce their own legal risk.”
Lawyers highlighted that many pension schemes have committed to transition to a net zero portfolio and claim that climate change underpins their investment strategies. However, a significant amount of pensions money remains invested in fossil fuels.
According to Make My Money Matter, UK pension funds wield a staggering £3 trillion in investment power. Of that, more than £88 billion is bolstering the fossil fuel industry with almost a quarter done through bond investments. [3]
These schemes are bound by existing legal duties – known as fiduciary duties – to protect their beneficiaries. Schemes are increasingly being required to demonstrate to regulators that they have properly considered the risk climate change poses to their portfolios.
Glascott added: “Pension scheme bond holdings span decades, but many include some of the riskiest investments long-term: fossil fuels.
“Fossil fuel projects have a high chance of being rendered obsolete in coming decades as the world’s energy system transitions to renewables. Pension beneficiaries are having their funds thrown behind risky projects for potential short-term profits – a strategy that risks undermining long-term reward for customers.
“Pension schemes – which promise a secure future in principle – have the chance to make that both a planetary and material reality for beneficiaries. They can make bond financing dependent on climate commitments and ensure that credible company transition plans are a condition for investment.”
Notes to editors:
[1] The Toxic Bond Initiative: https://toxicbonds.org/
[2] Sources: Governance and reporting of climate change risk: guidance for trustees of occupational schemes - GOV.UK (www.gov.uk);Climate change | Bank of England;ngfs_climate_scenarios_for_central_banks_and_supervisors_.pdf.pdf
[3] Fossil Fuels in UK Pensions report by Make Money Matter: https://makemymoneymatter.co.uk/wp-content/uploads/2023/06/Fossil-Fuels-in-UK-Pensions-report.pdf
About ClientEarth
ClientEarth is a non-profit organisation that uses the law to create systemic change that protects the Earth for – and with – its inhabitants. We are tackling climate change, protecting nature and stopping pollution, with partners and citizens around the globe. We hold industry and governments to account, and defend everyone’s right to a healthy world. From our offices in Europe, Asia and the USA we shape, implement and enforce the law, to build a future for our planet in which people and nature can thrive together.