Pension funds slow to recognise climate risks

The largest UK pension funds have failed to integrate climate risks into their investment decision-making, a survey has found

Just 5% of UK corporate pension funds have made arrangements for a specific climate change policy in their portfolios, and no schemes have a specific target for low carbon investments.

Research conducted by law firm Pinsent Masons among 43 corporate pension funds with £479 billion under management found that only 12% have a way of measuring the sustainability of their investments.

It comes as the UK’s Department for Work and Pensions prepares to introduce new regulations that require pension trustees to clearly define their approach to environmental, social and governance factors.

”It has been apparent for some time that climate change issues can affect financial returns,” said Carolyn Saunders, partner and head of Pensions & Long-Term Savings at Pinsent Masons.

“However, in the absence of a standardized approach to climate risk management in investments, most trustees are unsure how best to deal with the issue.”

Some pension funds are more active than others, however. The Universities Superannuation Scheme, for example, has stipulated that it wishes to remain ‘underweight’ carbon investments and Strathclyde Pension Fund carried out an assessment of its listed equity carbon footprint in 2016 and 2018.

The BBC Pension Scheme has undertaken a carbon foot-printing monitoring exercise and the South Yorkshire Pension Fund has also completed a carbon audit.

Pinsent Masons’ research follows the law firm’s recent report entitled Managing Climate Risk in a Changing Environment, which was released as guidance to trustees in how to build climate risk considerations into their portfolios.

“Clarity about trustee duties with regard to climate change is a priority,” explained Saunders. “The new regulations will make it clear that sustainability is a relevant consideration for all trustees, whatever their personal views or their ability to influence the businesses in which they invest.

“Trustees now need to decide how best they can discharge their duties in this area. For those who have not yet engaged with this area, the starting point is to assess the extent, if at all, to which their investment consultants and/or asset managers are currently taking account of ESG factors.”