The Chair of the cross-party Environmental Audit Committee has written to the top 25 pension funds in the UK to ask how they manage the risks that climate change poses to pension savings. The letters form part of the Committee’s enquiry into Green Finance.
It follows an admission from the Department for Work and Pensions – in a letter also published – that there is widespread misunderstanding amongst trustees on the scope of their fiduciary duty in relation to environmental risks.
Mary Creagh MP, Chair of the Environmental Audit Committee said: ‘Climate change means insurance firms will be hit with increasing claims related to extreme weather. Fossil fuel companies could lose value as the world implements the Paris Agreement on climate change to keep to below 2°C. Energy companies that do not make a timely low-carbon transition risk being left behind. We want to know what pension funds are doing to safeguard people’s pensions from the financial risks of climate change.
‘The climate change risks of tomorrow should be considered by pension funds today. A young person auto-enrolled on a pension today may be 45 years away from retirement. Over that timescale these climate change risks will inevitably grow. We are examining whether pension funds are starting to take these risks into account in their financial decision making.’
Evidence from the DWP and Bank of England: Asset owners, such as pension fund trustees, have a fiduciary duty to act in the best interests of their beneficiaries. The Committee heard during its inquiry that while, there are many examples of good practice, this duty is sometimes misinterpreted as a duty to maximise short-term returns. This leads to the neglect of longer-term considerations – including environmental sustainability and climate change-related risks and opportunities.
Evidence published from the Department of Work and Pensions states that: ‘We hoped that the publication of guidance on [considering environmental considerations where financially material] by The Pensions Regulator would address trustee confusion about their duties. However, recent research has suggested that a lack of attention and outright misunderstanding remain widespread among Trustees.’
The Committee is also publishing evidence from the Bank of England setting out the work it is doing to mitigate the risks that climate change poses to financial stability. This warns that: ‘Climate change and society’s responses to it, presents financial risks which impact upon the Bank’s objectives.’