Why Pension Fund Trustees Must Consider Climate Risk

Pension fund trustees can no longer ignore the risk that climate change poses to their investments, particularly in the longer term. Many of these individuals are have no idea about their financial duties and the extent to which the current law allows them to factor environmental, social and governance issues into their investment decisions.

Climate risk is relevant to the exercise of trustees’ duties in two key regards. First, the Paris Agreement and the objective of limiting warming to well below 2 degrees Celsius puts the international community firmly onto a low-carbon, non-fossil fuel pathway for the future. The second respect in which climate risk is relevant to the exercise of trustees and fund managers duties relates to its systemic nature. Not only is climate change likely to wipe off much of the market value of fossil fuels, it is predicted also to have impacts across the whole economy at global and national levels, and therefore to affect the financial sector as a whole.

The duty to act impartially as between beneficiaries requires trustees to give equal importance to the long-term needs of younger beneficiaries who will require their pension in 30-40 years’ time, as they do to older beneficiaries whose retirement will be far sooner. This is because climate risk is of a far greater threat to the investments of younger beneficiaries. Research indicates that pension fund trustees and managers are often excessively focused on maximizing short-term returns.

Currently, much of the pensions sector is “behind the curve” when it comes to factoring climate risk into their pension decisions. Considering climate change in the investment chain is therefore not about taking a risk. It is an essential means for trustees to cover their backs and avoid a risk of being found liable for losses to the fund that could have been prevented.

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