Pension funds should consider incorporating climate change into manager selection – UK trade body PLSA

Climate change poses “severe risks” to pension funds’ investments, the main pensions industry body the Pensions and Lifetime Savings Association (PLSA) has warned in guidance published today, in partnership with environmental law firm ClientEarth.

One of the main recommendations is that pension funds should review how current and prospective asset managers consider climate change as part of their investment decisions, and incorporate this into their manager selection processes.

The PLSA also suggests that funds should tell their asset managers to engage with companies on climate change and report using the framework recommended by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD).

The PLSA’s members represent around £1trn (€1.13trn) in assets and the guidance follows the Institute and Faculty of Actuaries (IFoA) saying last month that it wants to be at the forefront of advice to pension schemes about the long-term risks of climate change.

The new PLSA guidance notes that while climate change is commonly thought of as a long-term issue there is also a “serious risk” to pension funds’ investments in the short term.

It cited a recent report from Cambridge University that found that in the event of a 2°C increase, portfolios with a similar makeup to many pension funds could suffer permanent losses of more than 25% within five years.

And the PLSA, which holds its Trustee Conference today, added that senior figures from the Bank of England and The Pensions Regulator (TPR) have warned of the threat to financial stability posed by climate change. Today’s conference features an address by TPR Chair Mark Boyle.

The PLSA said its own stewardship survey found that 76% of respondents agreed that environment, social and governance (ESG) factors, such as climate change, can be material to investment performance.The guidance comes as the government today launched its latest investment management strategy, in which it highlights green finance and puts the size of the UK’s impact investment market at £150bn.

The guidance recommendations:

• Incorporating climate change expertise into trustee boards
• Reviewing how current and prospective asset managers consider climate change as part of their investment decisions, and incorporating this into manager selection processes
• Instructing asset managers to engage with investee companies on climate change
• Reporting on their management of climate change-related risk to beneficiaries using the TCFD framework.

Luke Hildyard, the PLSA’s Policy Lead: Stewardship and Corporate Governance, said climate change is “not just an ethical issue” but a major threat to financial stability highlighted by “numerous credible economic commentators and rigorous research”.

“It is therefore imperative that boards and committees consider the potential impact that climate change will have on their investment portfolios.”

Meanwhile, the International Corporate Governance Network (ICGN) has also picked up climate change among its 2018 priorities. The body, meeting in Paris this week, called for “consideration of company purpose and its broader social role also gives rise to how environmental, social and governance (ESG) factors are built into company strategy and operations – and integrated in investment analysis and engagement”.

“A key example is that investors should build awareness of how climate change affects systemic stability, and on how company boards are addressing climate risks at investee companies.”