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MPs are probing pension funds on their approach to climate change risk, as experts expect a ‘multi-pronged attack’ to push environmental concerns higher up trustee agendas.

The £60.6bn Universities Superannuation Scheme, the £49.3bn RBS Group Pension Fund and the £21.3bn Greater Manchester Pension Fund are among the schemes the committee has contacted.

Misunderstanding remains widespread

As part of its Green Finance inquiry, the EAC has asked which climate-related financial risks trustees are most concerned about, and whether the trustees have formally considered climate change risk at board or investment committee level.

The committee also sought views on whether guidance from the government or regulators on climate-risk reporting would be helpful for pension funds.

Creagh said: “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.”

On Monday, alongside an example of the letter sent to schemes, the committee published evidence from the Bank of England, stating that “climate change and society’s responses to it, presents financial risks which impact upon the Bank’s objectives”.

The committee also published a letter from the Department for Work and Pensions, which admitted that a lack of attention and outright misunderstanding seems to remain widespread among trustees.

Government regulation requires that trustees set out in the statement of investment principles “the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments”.

The DWP’s letter notes that this has the potential to cause confusion by conflating ethical considerations with social and environmental issues.

In response to the Law Commission’s report on pension funds and social investment last year, the DWP is set to consult on policy and regulations during 2018. Subject to the outcome of the consultation, it plans to bring forward legislation to clarify this point.

Stuart O’Brien, partner at law firm Sackers, agreed that “there is still some misunderstanding, or misinterpretation, among some trustees, but I don’t think it’s perhaps as systemic as is sometimes made out”.

Big schemes more likely to address climate risk

He said the bigger issue is that “trustees have a lot of things to think about, and limited governance time to do that”, so “even where trustees consider that ESG is a financial risk issue, not simply a moral or ethical viewpoint… they don’t necessarily devote a lot of time to it”.

Large pension funds may have more resources to address these issues compared with medium and smaller-sized schemes.

Luke Hildyard, policy lead for stewardship and corporate governance at the Pensions and Lifetime Savings Association, said: “If you’ve got a very large scheme… you can afford to employ people to look at stewardship [and] ESG.”

While the EAC’s action may be helpful in prompting trustees to think more about ESG, Hildyard said the reason trustees will come to engage more is less down to political pressure, and more due to "better understanding of what an important long-term investment issue it is”.

Andy Cheseldine, a client director at professional trustee company Capital Cranfield, said that when it comes to being proactive in terms of climate change risk “the big [schemes] are already doing it” and “the medium-sized pension schemes are the ones that have probably put less effort into it so far”.

Part of a wider direction of travel

A European Commission consultation, which closed in January this year, focused on institutional investors and asset managers’ duties regarding sustainability.

O’Brien said that this consultation, together with the EAC’s scrutiny, and the DWP’s intended consultation on changes to the investment regulations, are all part of a broader direction of travel in this area.

Joanne Etherton, pensions lawyer at Client Earth, agreed that “it’s very much a multi-pronged attack” and with schemes varying in size, structure and investments, “you need to look at this in a really broad way”.

Etherton added that “it’s amazing and exciting that the MPs are writing to these big funds”.

She noted how different parts of the pensions industry are getting involved. “All of these things together should hopefully get people to realise that it’s not just one area of the society who thinks this is something that’s important,” she said.

A new report by ClientEarth and ShareAction has found that contract-based pension providers have not taken sufficient action to address climate risk.

The report recommends that the Financial Conduct Authority take “urgent action to address climate risk and issue guidance to the firms it regulates to ensure that providers consider and, if necessary, take steps to manage climate risk and ensure the suitability of pension investment products”.

ClientEarth and ShareAction are encouraging the FCA to use its upcoming joint pensions strategy with the Pensions Regulator to ensure that the gap in regulation is closed.

An FCA spokesperson said: “We take climate risk seriously, and we have been working with other organisations to ensure a coordinated approach by financial regulators on climate-related issues.”

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