INSIGHT by Joanne Etherton, Climate Finance Lead at ClimateEarth
Looking back on 2020, one thing is clear: the imperative for pension providers to act on climate change has never been stronger.
| Deteriorating planetary heath is on red alert, with escalating heat, rampant wildfires and flooding. This has compromised infrastructure, agricultural yields and businesses –producing ripple effects across the economy. With the health of our economy at risk, the spotlight has fallen on the resilience of long-term investments like pensions.
This reveals a difficult truth – whether they like it or not, the pensions of working people and retirees will continue to fuel climate change unless the pensions industry takes action now. Thankfully, policy makers and legislators have been setting clearer pathways to drive the transition to a net zero carbon economy. Industry-wide initiatives and individual pension providers are setting targets and plans for pursuing transition strategies. And where they fall short, litigation may be deployed to confront pension providers.
| Policy and regulatory changes
This year’s upsurge in activity should not come as a shock to the pensions industry, which has long recognised the impact of climate change on long-term investments. Law and guidance in the EU and, particularly in the UK, have progressively clarified that pension providers should be treating climate change as a financial risk and integrating it into their investment and governance processes. The EU’s sustainable finance action plan continues to strengthen initiatives around how financial actors should respond to climate risk and to scale up opportunities for investors to seize sustainable investment opportunities. UK regulations have shown similar ambitions. It is clear, however, that greater guidance is required to raise the standards of climate-aware investing at pace.
In 2020, the UK Government introduced climate change amendments in the Pension Schemes Bill. Related policy proposals demonstrate what robust climate action should look like and seek to incorporate the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) – widely seen as the benchmark for meaningful climate disclosures in the financial sector. In November, the UK TCFD Taskforce published a roadmap towards mandatory climate related disclosures. This should result in greater consistency and collaboration across the pensions industry and the wider economy.
| Pension providers should be taking action now
But pension providers should not be waiting for these regulations and plans to take effect before taking action.
Policy proposals for the new regulations build on what has long been part of English law: fiduciary duties require pension providers to act in the best interests of members.
Fulfilling these duties and complying with existing regulations means properly considering and responding to the exposure of their scheme to climate change. Otherwise, they risk breaching the law.
With this in mind, leading pension providers are already developing climate targets and forward-looking investment and governance strategies.
Investor groups, which include some leading pension schemes, are also recognising the risk climate change poses to the financial system as a whole. They see the need for action to mitigate this risk at system and portfolio-level, including through robust engagement with investee companies and collective action initiatives. An example of this is Climate Action 100+, which brings investors together to advocate for large companies to take action on climate change.
| Litigation risk is becoming increasingly prominent
Climate risks to pensions don’t stop with the physical impacts on global economies and investment portfolios, or the speed and intensity of policy changes.
Climate change is a new source of litigation risk.
In November, one of Australia’s largest pension funds, Rest, agreed to settle litigation filed by a member, Mark McVeigh, who alleged it was failing to protect his savings from climate change. McVeigh’s arguments included that the fund’s trustee failed to act with care, skill and diligence when investing, and failed to act in his best interests, by not properly considering the risks climate change poses to the fund’s investments. Rest’s settlement commitments illustrated many of the elements that should underpin best practice for pension providers across jurisdictions, including the UK. The settlement will increase pressure on pension schemes’ responses to climate changeand increase the risk for those failing to take genuine steps to manage it.
| Looking ahead to 2021
With all of this in mind, there is much work to be done in 2021. Regulations, plans and strategies – which seek to raise the standard of climate action and contribute to the urgent transition to a net-zero economy – are expected from actors across the pensions investment chain; from policy makers, pension providers, asset managers, investee companies and, indeed, regulators. It is vital that these plans incorporate ambitious, credible strategies, with pension providers working with other investors to drive change.
Given its role looking after the pensions of working people and retirees, the pensions industry must address these issues to ensure the long-term resilience of their funds and the wider economy to the impacts of climate change.
| brief bio
Joanne Etherton is a qualified solicitor in England and Wales and a Fellow of the Pensions Management Institute. She currently leads the climate finance project at ClientEarth, where her work focuses on developing legal strategies to drive greater integration of climate-related financial risks into the management and investment decisions of corporates and institutional investors. Prior to joining ClientEarth, Joanne was a pensions partner in the London office of Weil Gotshal & Manges LLP.
ClientEarth is a charity that uses the power of the law to protect people and the planet. We are international lawyers finding practical solutions for the world’s biggest environmental challenges. We are fighting climate change, protecting oceans and wildlife, making forest governance stronger, greening energy, making business more responsible and pushing for government transparency. We believe the law is a tool for positive change. From our offices in London, Brussels, Warsaw, Berlin and Beijing, we work on laws throughout their lifetime, from the earliest stages to implementation. And when those laws are broken, we go to court to enforce them.
| All opinions expressed are those of the author. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.