Climate risk must be considered by pension funds, barristers say

5th December 2016


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Joanna Jones

Pension fund trustees could face legal challenge if they do not consider climate risk, according to a legal opinion by two barristers.

Keith Bryant QC and barrister James Rickards, who practice at Outer Temple Chambers and specialise in pensions and commercial law, were asked by environmental lawyers ClientEarth to consider the issue under common law, statutory law and funds’ own governance.

They concluded that trustees must take climate risks into account in investment decisions if the risks carry material financial implications for fund performance. The barristers stated that this was ‘beyond reasonable argument’ and that failing to do so ‘would not be a proper exercise of [trustees’] powers.’

The legal opinion also said that, if the issue of climate risk is raised with trustees – for example by pension fund members – they cannot refuse to think about it and must at least consider whether it could be financially material.

They pointed out that climate change risks would not necessarily be immediate and may give rise to longer-term financial consequences. The barristers highlighted that an investment should not be made purely on a potential climate risk, but trustees are legally bound to account for it when taking decisions on where to invest funds.

ClientEarth is currently analysing pension funds’ responses to members’ letters on the subject, and may mount a legal challenge if appropriate.

The legal opinion came after several developments on the issue of climate risk and pensions. In 2014, the Law Commission published a report on the fiduciary duty of investment intermediaries. It revealed evidence from campaign group ShareAction, which found that 25% of funds referenced fiduciary duty in response to member emails asking about their position on climate change – half as a reason to act on it, but half as a reason to ignore it.

The commission recommended that the government clarify pensions regulations concerning environment, social and governance (ESG) issues. So far the government has not done so, ClientEarth said.

In April, the Pensions Regulator pointed out that, because schemes operate over a long period, they are exposed to longer-term financial risks, including climate change and unsustainable business practices. These risks could be financially significant both over the short and longer term and trustees should decide how relevant these factors are as part of their investment risk assessment, it stated.

A new EU law, the IORP II Directive, confirmed that pension funds must assess ESG issues, including climate risk.

ClientEarth senior corporate lawyer Alice Garton said: ‘There is now abundant evidence to demonstrate that climate change presents major financial risks to investors as the world transitions to a low-carbon future in line with the Paris agreement. Pension fund trustees can no longer legally ignore this issue.’

Meanwhile, the United Nations Conference on Trade and Development (UNCTAD) said 21 of the world’s stock exchanges could introduce sustainability reporting standards by the end of the year, bringing the total number of bourses that ask listed companies to report on ESG issues to 38.

James Zhan, director of the Division on Investment and Enterprise at UNCTAD, which co-organises the Sustainable Stock Exchanges (SSE) initiative, said that 21 stock exchanges had committed to introduce such standards either this year or in the first quarter of 2017.

Just two have implemented sustainability reporting standards so far, but many have published draft guidelines for comment, according to Zhan.

‘Sustainability reporting has come of age,’ he declared, adding that it is not being advocated just by the UN and campaign groups but that the markets are demanding it.

Launched by UN secretary-general Ban Ki-moon in 2009, the SSE initiative now includes more than 60 stock exchanges, representing more than 70% of listed equity markets and around 30,000 companies, with a market capitalisation of $55 trillion.

‘Market expectations are shifting quickly and we see more and more stock exchanges viewing sustainability reporting as necessary and inevitable,’ said Anthony Miller, UNCTAD's SSE initiative co-ordinator.

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