The UK’s Environmental Audit Committee (EAC) is calling on top pension funds in the UK to disclose information on the risks that climate change poses to pension savings. The move was prompted by an admission from the Department for Work and Pensions that there is widespread misunderstanding amongst trustees on the scope of their fiduciary duty in relation to environmental risks.
Twenty-five pension funds, including Universities Superannuation Scheme, BT Pension Scheme and the RBS Group Pension Fund, with assets under management worth £555 billion, have been issued letters by the EAC, in which they were asked to provide responses to nine questions focused on climate risk. From these responses, the EAC plans to establish how the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) should be implemented.
“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,” said MP Mary Creagh, Chair of the Environmental Audit Committee.
“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.”
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According to the EAC, asset owners, such as pension fund trustees, have a fiduciary duty to act in the best interests of their beneficiaries. However, despite many good examples of this practice, this duty is sometimes misinterpreted as a duty to maximize short-term returns. This leads to the neglect of longer-term considerations — including sustainability and climate-related risks and opportunities — and is the very thing that got Australia’s Commonwealth Bank into trouble last year. After failing to properly disclose the risks posed to its business by climate change in its 2016 annual report, the bank found itself being sued by shareholders for depriving them of a “true and fair view” of the company’s financial position and performance.
The letters form part of the Committee’s wider Green Finance inquiry launched back in November which is currently considering how international recommendations on climate-related financial risk disclosures should be implemented in the UK. In addition to engaging the UK’s largest pension funds, the Committee has also requested the same information from the MP’s Pension Fund.