Climate change risk ‘needs’ to be factored into pension scheme investment strategies

Climate change risk ‘needs’ to be factored into pension scheme investment strategies

Pension trustees must incorporate climate change risk assessment into their investment strategies, a new report from Pinsent Masons and the University of Leeds has argued.

The report, Managing Climate Risk in a Changing Environment, provides recommendations for how trustees can engage with the investment chain on climate risks in ways that are appropriate and proportionate for their schemes

Carolyn Saunders, head of pensions and long-term savings at Pinsent Masons, argued that pension scheme trustees have a fiduciary duty to take account of factors that present a material threat to the financial performance of their fund.

She said: “Clearly there is a potential for climate change to impact negatively on investment returns; so by incorporating climate change risk assessment into their investment strategy, strategic asset allocation, the selection and monitoring of fund managers and their stewardship activities, trustees can start to mitigate the risks this poses.”

“Our report enables trustees to begin proactively engaging with the investment chain, placing them in a position to start making informed decisions about investments right away.”

The release of the report follows UK Parliament’s environmental audit committee last month writing to the country’s top 25 pension funds, asking them to explain how they are managing the risk of climate change.

Mary Creagh MP, chair of the committee, warned that factors such as insurance firms being hit with increasing claims related to extreme weather and fossil fuel companies losing value as the world implements the Paris Agreement on climate change need to be incorporated into investment strategies.

Creagh said in March: “We want to know what pension funds are doing to safeguard people’s pensions from the financial risks of climate change.”

“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.”

Categories: News, UK Pensions

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