Law firm and NGOs challenge UK regulator on pension funds duty to assess climate change risk

Exclusive: The UK Pensions Regulator (TPR) and the government Department for Communities and Local Government (DCLG) are being challenged to respond to a legal briefing, which argues that the 89 local government pension schemes (LGPS), the country’s largest retirement system representing hundreds of billions of pounds in assets for council workers, must assess the potential risks of climate change on investment returns, and can’t legally sidestep the issue by claiming their asset managers or engagement service providers do so.
RI has been told that ClientEarth, the environmental law firm and ShareAction, the responsible investment NGO, have allied with members of a number of large UK pension funds, including the London Pension Fund Authority and the West Yorkshire Pension Fund, to send the demand for an investigation to the TPR and the DCLG on what they argue is a major discrepancy in fiduciary duty. They point out that some LGPS schemes consider climate change a material financial risk/return issue to be considered in trustee decisions, while others do little, give the responsibility to fund managers or engagement specialists, or claim climate investment risk would be underwritten by local government scheme sponsors. However, the NGOs argue the law is clear that decisions such as strategic asset allocation, portfolio risk, selecting and monitoring of investment managers and stewardship activities, are the responsibility of the pension fund alone. And they point out that investment evidence from some of the biggest names in the industry such as BlackRock, Goldman Sachs, Schroders and Mercer show climate change can be a major risk factor in such strategic investment decisions.
Sources said the legal briefing argues that physical risks such as increasing temperatures, rising sea levels and more frequent and severe weather events are already impacting asset values. In addition, it says technological and regulatory developments are rapidly changing the economics of energy and related industries – a major source of pension fund returns – while systemic risk could weaken economic growth and lower returns across entire pension investment portfolios.The sources told RI that the legally-argued paper lays out clear investment evidence and law citations as to why climate change is a fiduciary risk, and shows how some schemes are already taking relevant steps, thus creating evidence for a legal precedent. They said ClientEarth and ShareAction were basing their case for pension fund climate ‘action’ versus ‘inaction’ within the LGPS on responses to Freedom of Information requests sent to the 89 funds last year by the NGOs Community Reinvest and Friends of the Earth.
The challenge appears to develop a previous legal initiative revealed by RI last year, which was being backed by The Children’s Investment Fund Foundation (CIFF), the $4.4bn charity set up by the London-based billionaire hedge-fund manager Sir Chris Hohn and his former wife Jamie Cooper-Hohn.
It is also hugely significant because the LGPS are being rearranged into eight giant pools, some running assets of up to £40bn, and are gaining important public profile. Link to RI story on LGPS pooling
Significantly, it could get a positive hearing with the regulator. Lesley Titcomb, TPR Chief Executive, last year said ESG “can’t be ignored”, but acknowledged pension trustees’ confusion. She said the regulator would launch guidance for the defined benefit (DB) space this year that would be “congruent and aligned” with a ruling by the UK Law Commission, and guidance from government, which broadly says that trustees are obliged to consider ESG factors that are financially ‘material’. At the time, Titcomb said surveys showing trustees were failing to take stock of the financial risks of climate change were “interesting – not to say a little bit disturbing”. Link to RI story