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Results of MP’s probe into the way the UK’s largest 25 pension funds deal with climate risks shows a ‘mixed response’.

How pension funds deal with climate change

MPs from the Environmental Audit Committee (EAC) have now published the results of their probe into the way the UK’s largest 25 pension funds deal with risks from climate change. (Combined assets of these 25 pension funds worth over £500 billion.)

They’d written to these funds earlier in the year amidst concerns that many trustees misunderstand the scope of their fiduciary duty when it comes to environmental risks.

You can find a sample of the letter sent to trustees, including questions asked, here.

A mixed response

Following the EAC’s analysis of responses from the top 25 pension funds, Mary Creagh MP, Chair of the Environmental Audit Committee, concludes:

“It is encouraging that a majority of the UK’s largest pension funds say they are taking steps to manage the risks that climate change poses to UK pension investments. But a minority of funds appear worryingly complacent. Pension funds should at least assess the exposure of their assets to the physical, transition and liability risks from climate change that will materialise during savers’ lifetimes.”

You can find individual responses of the different schemes here (including a summary table.)

Analysis

The vast majority of funds listed at least one action in response to climate risks, with the majority also discussing climate risk with an actuary and / or at Board level.

Most funds stated that they were committed to or considering reporting climate change risks and opportunities in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Based on their responses, pensions schemes were classed as ‘more engaged’, ‘engaged’ and ‘less engaged’. Interestingly, only four schemes were classed as ‘less engaged’ by the EAC.

Short description of engagement categories:

  •  More engaged – taking steps to understand and reduce risks from climate change. Support recommendations on climate risk reporting – either committed or considering reporting in line with TCFD proposals.
  • Engaged – acknowledge climate risk but see it as one of many environmental, social and governance (ESG) factors to consider. Greater caution around climate risk reporting but some funds considering it.
  • Less engaged – not formally considered climate risk. Typically one of many ESG risks left to investment managers to manage. Does not plan to report on climate risks in line with TCFD recommendations.

What about other funds?

I’m curious about engagement levels at other UK pension schemes because my experience is that it isn’t as high as those sampled by the EAC. The probe focused on the largest UK funds, many from financial services, public sector or once nationalised industries. I wonder if the views of trustees of the funds sampled are ‘typical’ of other pension funds. Either way, I expect a lot more engagement from trustees in the future given the increasing focus on sustainability and responsible investment from the Government and regulators.

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