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UK pensions law reform will “sweep climate confusion off the table”

Environmental lawyers at ClientEarth have strongly welcomed a landmark policy slated by the Department of Work and Pensions (DWP) that will require UK pension schemes to report on climate risk where it poses financially material risks to the fund.

ClientEarth pensions lawyer Natalie Shippen congratulated the government on the move. She said: “Even though the law is already clear, those in charge of our savings are overlooking one of the biggest risks out there. This had to be resolved and we are delighted DWP has stepped up to make expectations clear.

“Environmental, social and governance (ESG) factors are often financially material but many trustees understand these two concepts to be mutually exclusive. Explicit clarification in UK pensions law of trustees’ duty to assess ESG factors – where these are financially material – will sweep confusion over climate risk off the table.

“There is a mammoth sum of money tied up in pension funds and the way this is invested has a huge influence on how quickly we move to a low-carbon economy. This reform will empower trustees to consider climate risks and make investment decisions in line with the energy transition.”

Momentum on pensions and climate is peaking

DWP’s move is the crest of a swell of developments over the last decade around pensions and climate. Last year, EU leaders agreed the IORP II Directive, which will require pension funds to take into account climate-related risks. This was followed by an expert legal opinion that agreed trustees would not be properly exercising their powers if they failed to manage climate change where it is found to be a material financial risk. And just this month, the Pensions and Lifetime Savings Association (PLSA) issued comprehensive guidance on taking climate risk into account in investment decisions.

But a recent survey by industry magazine Professional Pensions revealed many trustees are still in the dark about the fact that ESG issues often pose financially material risks to funds. The Pensions Regulator (tPR) has previously urged trustees who think ESG issues were not significant to “wake up and smell the coffee”.

In 2014, the Law Commission’s notable review “Fiduciary duties of investment intermediaries” recommended the government clarify trustees’ duties to consider long-term, systemic risks like climate change. The core points were reiterated in 2017 in “Pension Funds and Social Investment”. What DWP has published today is a response to those points.

Getting up to speed across the board

DWP’s interim response agreed with the Law Commission that “regulatory clarity would help remind trustees that they should take account of all relevant financially material factors, whether these are ‘traditionally’ financial or related to broader risks or opportunities, such as environmental, social and governance issues.”

The proposed reform will also impact contract-based pensions, making investment practices consistent across the industry where ESG risks are concerned. So far, the Financial Conduct Authority (FCA), which is responsible for contract-based schemes, has remained reticent on climate risk, despite explicit recommendations from the Law Commission. ClientEarth’s lawyers believe the reform will prompt much-needed action from the regulator.

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