UK local authority funds “imprudent” to ignore the financial risks of climate change

Environmental law practice ClientEarth is increasingly working with investors

ClientEarth, the environmental law firm that is increasingly working with leading responsible investors, has said it would be “highly imprudent” for local authority pension funds to ignore the financial risks of climate change.

The government this week said that boycotts in public procurement were “inappropriate” outside of formal legal sanctions, embargoes and restrictions put in place by the government.

“Like any other pension fund scheme, the local government pensions scheme must adequately ensure that it protects the pension pots of its savers and that effectively means balancing long-term risks against returns,” said Natalie Smith, climate litigation lawyer at ClientEarth.

“On that basis it would be highly imprudent of the local authorities, under the local government pension scheme, to ignore the financial risks of climate change.”

The firm – whose backers include the government’s own Department for International Development – argues that public bodies have a legal duty to make responsible investments.

“Local authorities and public bodies across the UK have a duty to protect pension fund holders from risky investments which – given their long-term focus – includes those in fossil fuel companies,” the firm said.

ClientEarth pointed to the Paris Agreement as showing the transition to a low carbon world meant that fossil fuel investments are increasingly risky for long-term investors.It argues that local authorities that protect beneficiaries from climate risks are “making a responsible investment decision, not taking a political stance.”

Earlier this month ClientEarth CEO James Thornton, Howard Covington, a former investment management chief, and climate economist Professor Cameron Hepburn argued in science weekly Nature that legal action against investors who ignore climate risk would not be simple, but could succeed.

And in late January ClientEarth and a group of leading investors wrote to the Financial Reporting Council (FRC) watchdog saying that fossil fuel companies must reveal long-term risks. ClientEarth worked with Sarasin & Partners on the letter on behalf of the investor coalition, which includes Legal & General Investment Management, APG and the Local Authority Pension Fund Forum.

The government guidance is primarily aimed at stopping local authorities from boycotting companies in Israel, with the government arguing that “divisive town hall boycotts” are “poisoning and polarising debate, weakening integration and fuelling anti-Semitism”. Any public body breaching the regulation would face “severe penalties”.

Cabinet Office Minister, Matthew Hancock said: “The new guidance on procurement combined with changes we are making to how pension pots can be invested will help prevent damaging and counter-productive local foreign policies undermining our national security.”