‘Lightbulb moment’ as climate risk hits the mainstream for UK pensions industry

UK pensions law is set to require pension providers to consider climate risk in core investment decision-making, the government has indicated.

Proposed changes to current pensions law were published this week, with the Financial Conduct Authority (FCA) confirming climate risk should be considered alongside “equally important” risks like liquidity risk and inflation in devising investment strategies for pension schemes. The FCA has promised to publish guidance for pension providers.

Lawyers have described it as a breakthrough moment for the UK pensions industry.

ClientEarth pensions lawyer Danielle Lawson said: “Climate risk has hit the mainstream. The UK’s top financial regulator has acknowledged that climate change presents material risks for investors, equating it with core economic risks like liquidity, interest and inflation. This busts a persistent myth in the industry.

“At the same time, the proposed changes to UK pensions law will end any debate among trustees: climate change risks and opportunities must be considered in schemes’ investment strategies.”

ClientEarth made recommendations to the FCA on contract-based pension schemes and climate risk in February this year, many of which have been taken up in the papers.

Lawson said: “This is a lightbulb moment for UK pensions – the FCA’s acknowledgment that financially material climate risks should be incorporated into investment decision-making, as part of pension providers’ legal duties, opens the door to a much more in-depth consideration of exposure to climate risk for UK markets and financial institutions generally.

“We hope that the FCA will now participate in the next round of Adaptation Reporting under the Climate Change Act and establish itself as a recognised authority on how the financial sector should act on climate.”

The FCA and the Pensions Regulator (TPR) have been consulting on the content of a proposed joint strategy for regulating UK pensions. TPR has already issued guidance which identifies climate risk as a potentially material factor which trustees should consider in their investment strategies.

Lawson added: “Today’s response is a promising indication that the regulators will recognise the need to align their investment guidance on climate risk and other financially material long-term factors.”

Notes from the report

ClientEarth has been calling on the FCA to produce guidance for pension providers. The authority has promised:

“The FCA considers that explicit guidance on financial and non-financial factors would be helpful to providers of workplace personal pension schemes, since its existing rules are high level. Such guidance would encourage providers to take account of ESG and climate change factors that are financially material. It would also encourage providers to consider social impact investment and member concerns in the right way.”

The paper equates climate risk with other ‘traditional’ financial risks, but also notes the opportunities it presents:

“The FCA considers that financially material ESG risks, including climate change risks, should be incorporated into investment decision making. But providers should also incorporate other equally important risks, such as interest rate, inflation, liquidity, concentration, exchange rate, political and counterparty risks. In addition, ESG considerations, including climate change, may represent investment opportunities as well as risks.”

Read the DWP’s proposed pensions law amendments: Consultation on clarifying and strengthening trustees’ investment duties
Read the government’s final response to the Law Commission’s recommendations (including the FCA’s comments and responses)




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