COMMONS

MPs seek answers from pension funds on climate risk

05 March 2018

The Chair of the cross-party Environmental Audit Committee has written to the top 25 pension funds in the UK to ask how they manage the risks that climate change poses to pension savings. The letters form part of the Committee’s enquiry into Green Finance.

It follows an admission from the Department for Work and Pensions – in a letter also published today – that there is widespread misunderstanding amongst trustees on the scope of their fiduciary duty in relation to environmental risks.

Mary Creagh MP, Chair of the Environmental Audit Committee said:

‘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.

‘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.’

 Evidence from the DWP and Bank of England: 

Asset owners, such as pension fund trustees, have a fiduciary duty to act in the best interests of their beneficiaries. The Committee heard during its inquiry that while, there are many examples of good practice, this duty is sometimes misinterpreted as a duty to maximise short-term returns. This leads to the neglect of longer-term considerations – including environmental sustainability and climate change-related risks and opportunities.
 
Evidence published today from the Department of Work and Pensions states that:

‘We hoped that the publication of guidance on [considering environmental considerations where financially material] by The Pensions Regulator would address trustee confusion about their duties. However, recent research has suggested that a lack of attention and outright misunderstanding remain widespread among Trustees.’

The Committee is also publishing evidence from the Bank of England setting out the work it is doing to mitigate the risks that climate change poses to financial stability. This warns that:

‘Climate change and society’s responses to it, presents financial risks which impact upon the Bank’s objectives.’

Notes To Editors

The committee’s Green Finance inquiry is currently considering how international recommendations on climate-related financial risk disclosures should be implemented in the UK. As part of this work, the committee will be examining how the largest UK pension funds are managing environmental risks, such as climate change. The Committee has also requested the same information from the MPs' Pension Fund.

The total value of the assets under management by the twenty five top pension funds in the UK is approximately £555 billion. The list of schemes that the committee has written to are below (source: Professional Pensions, Dec 2017).  We have attached one of the identical letters as an example.

Name of Scheme

Assets Under Management £bn
Universities Superannuation Scheme 60.55
BT Pension Scheme 49.34
RBS Group Pension Fund 44.1
Barclays Bank UK Retirement Fund 31.82
Electricity Supply Pension Scheme 31.19
HSBC Bank UK Pension Scheme 27.32
Railways Pension Scheme 25.48
BP Pension Fund 24.45
Greater Manchester Pension Fund 21.27
Lloyds Bank Pension Scheme No.1 Defined Benefit Section  19.83
Strathclyde Pension Fund 19.69
National Grid UK Pension Scheme 16.84
New Airways Pension Scheme (British Airways) 16.06
Shell Contributory Pension Fund 15.95
BBC Pension Scheme 15.84
British Steel Pension Fund (Tata Steel UK) 15.05
HBOS Final Salary Pension Scheme 14.76
Aviva Staff Pension Scheme 14.4
West Midlands Pension Fund 14.29
West Yorkshire Pension Fund 13.63
Rolls-Royce Pension Scheme 13.35
Tesco Pension Scheme 13.2
BAE Systems Pension Scheme  13.01
Ford Salaried, Hourly Paid Contributory & Senior Staff Pension Funds 11.96
Mineworkers' Pension Scheme 11.4
Total assets under management:  554.78

In April 2015, G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board to review how the financial sector could take account of climate-related risks. The Financial Stability Board established an international industry Task-Force on Climate-related Financial Disclosures (TCFD) chaired by Michael R. Bloomberg.

In June 2017, the TCFD published its recommended framework for financial disclosures on climate-related risks and opportunities. The Task Force divided climate risks into two major categories: risks related to the transition to a low-carbon economy; and risks related to the physical impacts of climate change. It made four recommendations on climate-related financial disclosures in public financial filings applicable to organisations across sectors and jurisdictions:

Governance:

  • Organisations should describe how climate related risks and opportunities are assessed and managed by an organisation’s management team and overseen by its board.

Strategy:

  • Organisations should disclose the actual and potential impacts of climate related risks and opportunities on their businesses, strategy and financial planning.

Risk Management:

  • Organisations should disclose how they identify assess and manage climate related risks.

Metrics and Targets:

  • Organisations should disclose the metrics and targets used to assess and manage relevant climate related risks and opportunities where such information is material.

The Government has endorsed the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), which apply to companies, investment managers, pension funds and other asset owners.

The Environmental Audit Committee launched its green finance inquiry in November to examine how the UK can mobilise the investment necessary to meet our climate change targets and factor sustainability into financial decision-making. The committee conducted five days of hearings with investors, asset owners, experts, financial regulators and Government ministers.

Further information

Image: Parliamentary copyright

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