A UK parliamentary committee said the British government should make it mandatory for asset owners such as pension funds to report their exposure to climate change risks by 2022, as it doesn’t believe a voluntary approach will be effective.
“Climate change and other environmental problems pose financially material threats to our economy,” said the Environmental Audit Committee (EAC). “In the time it takes today’s young people to reach retirement age, the projected rise in sea levels and the increased frequency and intensity of extreme weather events will have increasingly serious economic consequences for a range of investments.”
The committee said that sectors and companies that do not make a timely low-carbon transition may face costly regulatory or legal action as the world implements the Paris Agreement.
“Despite this, many financial institutions, businesses, and regulators continue to ignore the financial risks and opportunities associated with climate change and other sustainability issues,” said the committee. “Proper recognition and disclosure of these risks and opportunities would help financial markets work more efficiently and will enable UK institutions and investors to position themselves to benefit from the low-carbon transition.”
The committee said structural incentives encourage a focus on short-term returns, often to the neglect of longer-term considerations, such as environmental sustainability, and climate change-related risks.
“Confusion about the extent to which pension trustees have a duty to consider environmental risks can also prevent institutional investors taking action to address climate change risks,” said the committee.
The committee conducted a survey of the UK’s top 25 pension funds, which have £550 billion in investments, that revealed a mixed performance concerning climate risk awareness.
“In some quarters we encountered an outdated perception that climate change is purely an ethical or corporate social responsibility issue rather than a real material risk to present and future value,” said the committee. “The government should clarify that pension schemes and company directors have a fiduciary duty to protect long-term value and should be considering environmental risks in light of this.”
It insisted that pension participants should be given greater opportunities to engage with decisions about where their money is invested.
“There is evidence that younger generations would often prefer to see their money invested in a fossil fuel-free manner,” said the committee. “They should be given greater opportunity to express this preference.”
The committee pointed out that there is currently no requirement for pension fund trustees to engage with beneficiaries when creating a statement of investment principles (SIP). There is also no requirement to communicate the SIP to beneficiaries once it is completed. The committee said the government should require fiduciaries to actively seek the views of their beneficiaries when producing SIPs.
“There is growing international momentum behind moves to encourage financial reporting on sustainability,” said the committee. “It is important to ensure that climate risk reporting applies equally to asset owners (such as pension funds) and their investment managers, not just listed companies as the government has suggested.”