UK pensions body criticised for “irresponsible” stance on climate change and trustee duties

Note: The standfirst of this story was amended after publication to change the word “guidance” to “rules”.

UK-based law firm ClientEarth has slammed the Pensions and Lifetime Savings Association for its recent call to drop climate risk from regulation governing trustee duties, saying the move would be “hugely irresponsible”.

RI reported yesterday that the PLSA – the UK’s main pension industry body representing £1trn (€1.1trn) in assets – had responded to a public consultation from the Government’s Department of Work & Pensions (DWP) on how trustee duty rules should be updated. Its response took many by surprise by saying it did “not believe that ‘climate change’ should be included specifically in the drafting of the new regulations that could result in the regulations being unintentionally prescriptive.”

ClientEarth, which has worked with the PLSA on the topic, co-publishing a report last year to support trustees in integrating climate risk into investment decision making, led the backlash against the response today, saying there was a contradiction between the proposal to omit any explicit reference to climate change and the PLSA’s acknowledgement that “climate change poses a substantial risk to the business models of companies in nearly every sector, and the stability of the financial system” which in turn has “profound consequences for pension funds’ investments”.

“Climate change must be on trustees’ agendas – too many pension professionals are still worryingly under-informed about the pressing portfolio risks it poses,” said ClientEarth finance lawyer Alice Garton. “The recent proposals from the DWP are a crucial step in making that happen and not a moment too soon. It would be hugely irresponsible to row back on this important development.”

Garton pointed to the recent recommendation from UK Parliament’s Environmental Audit Committee to create a new law if asset owners and firms haven’t started adequately reporting on climate risk by 2022.

“The PLSA says that singling out climate risk might lead trustees to prioritise it unduly over other important ESG risks,” ClientEarth said. “However, as already reflected in many investor strategies, it is the scale and systemic nature of the risks associated with climate change and the low carbon transition which set them apart from other ESG factors.”Fiona Reynolds, Managing Director of the Principles for Responsible Investment, echoed Client Earth’s concerns, tweeting yesterday that PLSA’s response was “very unprogressive+backwards [sic] in understanding both risks +opportunities to pension funds”. “The reason #climate is explicitly mentioned is – it is the biggest risk +most urgent,” she added.

“Very unprogressive” – Fiona Reynolds

The DWP consultation closed at around the same time as another public consultation by the UK’s Department for Environment, Food and Rural Affairs (DEFRA), looking at how national institutions and sectors are adapting to climate risk. In its summary of the consultation, published last week, DEFRA confirms that it has asked The Pension Regulator to join the list of bodies disclosing on this topic. TPR told RI that it was “engaging with government bodies including DEFRA about addressing current and future climate change impacts”.

Update

The PLSA responded to the comments from ClientEarth and Fiona Reynolds after publication, stating that it “believes that climate change poses a substantial risk to companies in nearly every sector, as well as a risk to the stability of the financial system. It is therefore important that pension schemes consider risks related to climate change as part of their investment strategies, however this is clearly not the only ESG factor schemes will want to consider”.

“In our response to DWP’s consultation we argue that including climate change specifically in the definition of ESG in the draft Regulations themselves could confuse the issue for trustees by unintentionally narrowing their focus. We believe that picking out any one factor as a specific example may lead trustees to assume that is the most important factor to consider, when others might be more relevant to their portfolio. We think that regulatory guidance is needed to set out a more comprehensive set of expectations for trustees on the range of issues they should consider, which climate change must certainly be an important part of.”