UK pensions are opening themselves up to potential lawsuits if trustees don’t develop an approach to climate risk that is in line with improving data and market practices, according to non-profit environmental law organization ClientEarth.
ClientEarth’s climate finance lawyers have sent letters to the trustees of 14 of the UK’s largest pension plans after a recent House of Commons’ Environmental Audit Committee’s (EAC) green finance inquiry highlighted a lack of understanding of climate risk among some of the UK’s largest pension plans.
“The EAC raised climate risk as a key financial issue with some of the UK’s biggest schemes,” ClientEarth lawyer Joanne Etherton said in a release, “and some of the responses showed a woeful level of understanding and awareness, suggesting that trustees are still not clear on what is legally required of them.”
The letters ask the trustees to make a public statement to members that clearly outlines the steps they are taking on climate risk, and also warns them that they could face legal action from plan members could if they don’t take climate risks seriously.
For example, in its letter to the New Airways Pension Scheme, which is one of the retirement plans for British Airway employees, ClientEarth offered actions the pension could take to protect itself legally. This included integrating climate change into the plan’s investment beliefs, reallocating assets in line with those investment beliefs, and moving passive investments into products tracking low-carbon indices, among other suggestions.
The letters also follow a new report issued by ClientEarth and advisory firm Sustineri that reviews the investment sector in several Organization for Economic Co-operation and Development (OECD) countries to assess the market standards on climate-related risk by asset managers.
Among the key findings of the report was that fiduciary duty and a focus on risk-adjusted returns over the longer term are key drivers in the approach taken by asset owners toward climate risk. Some asset managers also emphasize the short- to medium-term investment risks posed by climate change.
“This approach is linked to a recognition that climate change is a material financial risk and the need therefore to safeguard the resilience of the portfolio over multiple time horizons,” said the report.
The report also said governance structures around climate change are becoming more robust, with the majority of funds reviewed highlighting climate-related risk in their reporting documentation, either in their annual report, in a supplementary sustainability disclosure, or through engagement with regulatory or industry bodies.
“These schemes represent the retirement income of a large number of people, making it crucial that they step up their actions on protecting and future-proofing members’ pensions,” said Etherton. “Trustees’ legal duties are not static, and a court would look to the evidence available and how their peers are responding in determining whether they are in breach—in short, legal duties on climate risk are evolving.”