climate risks

The chair of the UK’s House of Commons Environmental Audit Committee has written to the top 25 pension funds in the UK to ask how they manage climate risks and their potential impact on pension savings as part of its inquiry into green finance.

This follows the endorsement by the British government of the Task-Force on Climate-related Financial Disclosures’ (TCFD) recommendations and the MPs are looking for views on how these could be implemented. The letter to the pension funds comes as the government admitted to the committee that there continues to be a misunderstanding by trustees about their duties in respect of environmental, social and governance issues.

pension funds
MP investigate how pension funds manage climate risks

The government said that the 2014 Law Commission inquiry into the fiduciary duty of trustees found that pensions regulations were causing confusion. Specifically this was the legal requirement that trustees set out, in the fund statement of investment principles which they are required by law to review no less frequently than every three years: ‘the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.’

In its letter to the committee, the Department of Work and Pensions said the requirement conflated ethical considerations with social and environmental issues. The government said that in fact environmental considerations (and by extension social issues too) would often
constitute financially material risks. Second, the requirement suggested that there would be cases where no social or environmental considerations will be financially material. The DWP said it believes such instances would be rare if they existed at all.

It was hoped that guidance on ESG issues by The Pensions Regulator would address the misunderstanding of pensions trustees but the DWP admitted they persist. As a result of the conclusions of a follow-up report by the Law Commission last year, the government is committed to holding a consultation commencing in May or June last year on regulations which will be as effective as possible in delivering the right level of evaluation and consideration of ESG issues by trustees.

The Environmental Audit Committee launched its green finance inquiry in November to examine how the UK can mobilise the investment necessary to meet our climate change targets and factor sustainability into financial decision-making.

Last Updated: 9 March 2018
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