Actuaries to take leading role in climate change advice to pension funds

Institute and Faculty of Actuaries responds to ClientEarth reports

Actuarial body the Institute and Faculty of Actuaries (IFoA) has said it wants the profession to be at the forefront of advice to pension schemes about the long-term risks of climate change.

It comes in response to environmental law firm ClientEarth saying investment consultants and actuaries are increasingly at risk of litigation and sanctions if they fail to keep pace with quickly evolving climate change regulation.

The firm has today published two reports – one for actuaries and one for investment consultants – highlighting the legal risks defined benefit (DB) pension scheme advisors face if they fail to address climate change in the advice they give pension fund trustees.

It warns that they “may become a prime target for costly and reputationally damaging litigation” if pension schemes’ financial position deteriorates because of a “failure to consider or manage climate risk”.

ClientEarth draws attention to growing consensus that climate risks are material ones that need to be incorporated into investment decisions. It cites the recent guidance for DB schemes from the UK’s Pension Regulator (TPR) which states climate change risks “could be financially significant, both over the short and longer term”.

The reports – part of ClientEarth’s ‘Risky Business’ series – offers actuaries and consultant ‘action points’ designed to help them manage the risks around climate change. It also highlights the potential climate-based liability risks implicit in professional standards that the advisors are already subject to.

ClientEarth lawyer Daniel Wiseman said: “Climate risk is present throughout the investment chain and so too is the responsibility to monitor and manage it…greater awareness of these legal duties will help protect professional advisors, trustees and the schemes they serve, form loss and liability arising from climate change risk.”

In September, RI reported that 12 investment consultants representing the bulk of the UK pensions advisory market had committed to raise awareness among their clients of the TPR’s guidance that schemes should examine where ESG factors are material over the long-term to their investments.In response to the ClientEarth reports, new IFoA president Marjorie Ngwenya said they “demonstrate the important role of actuaries – including those who work as investment consultants – in helping pension funds to properly take account of climate-related risks”.

Ngwenya, on a mission to ‘future-fit’ the profession, added the body wanted to take a “leading role”, using actuaries’ expertise to enable scheme sponsors and trustees to understand longer-term risk exposure.

“We will continue to investigate the impact of climate risk across other relevant sectors”

“We will continue to investigate the impact of climate risk across other relevant sectors, and publish further guidance where appropriate.”

This year has seen the IFoA ramp-up its efforts to raise awareness of ESG amongst its members and the wider investment community, as it seeks to play a more prominent role in the growing debate around responsible investment.

In September, it made its commitment to ESG official by becoming a Network Supporter of the Principles of Responsible Investment (PRI).

Speaking earlier to RI, Claire Jones, Chair of the IFoA’s ESG Working Party, said that the IFoA’s decision to be become a PRI Network Supporter is a continuation of the “mainstreaming of responsible investment” and the “latest stage in the IFoA’s long evolving interest in topics related to responsible investing”.

She added, “we felt that the IFoA was already supportive of responsible investment and fulfilling most of the criteria for becoming a network supporter, so we wanted to formalise and publicise that commitment”.

The decision to become a Network Supporter follows the IFoA’s unprecedented decision in May to send its first climate-change “risk alert” to its members.

The Alert – the IFoA’s mechanism for offering “non-mandatory guidance” to its members – drew attention to the “material risk” that climate change poses, stressing its members’ responsibility to “consider how climate-related risks affect the advice they are providing”.