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Trustees and actuaries must face up to legal risks of climate change, says IFoA

UK body issues latest report on the topic

The Institute and Faculty of Actuaries (IFoA) has described the “spectre” of potential climate change litigation for its members and pension fund trustees, releasing its most explicit guidance on climate risks to date.
Addressing members working in defined contribution (DC) schemes, the London-based global actuarial body warned: “Actuaries could be subject to litigation from members and/or trustees for not highlighting the potential financial risks arising from climate change in their advice”.
Trustees too are cautioned on the potential for “an event such as a class action by a group of DC pension scheme members, seeking to recoup investment losses arising from climate risk”.
Climate considerations as a part of fiduciary duty – a subject to be taken up by the European Commission as part of its recent Action Plan on sustainable finance – is also addressed. It states: “To the extent that climate change could have a material impact on long-term member outcomes…both financial and non-financial, then there is an argument for including it appropriately in analysis and decisions”.
This latest guidance follows the release of a climate risk alert by the IFoA to its members in May 2017. It sought to draw their attention to the “material risk” that climate change poses, and stress their responsibility to “consider how climate-related risks affect the advice they are providing”.
Previous guidance to defined benefit actuaries by the IFoA – also issued in May 2017 – focused more generally on resource and environment issues but did consider climate risks.
Sandy Trust, the Institute’s Defined Contribution Working Group Lead, cited a degree of inertia amongst members in the wake of the risk alert, stating that the IFoA was not “inundated” with requests for guidance. But added that, “the spectre of liability is there and those charged with governance should be alert to this risk”.
Trust explained that the latest “practical guidance” is designed to “equip actuaries with mechanisms to deal with the risk alert”.
He added that the IFoA felt it was “appropriate” to issue guidance specifically on climate risks, as it was the topic “that was most pertinent and most underlined by regulators”.Assets in UK DC schemes are predicted to swell six-fold to £1.68tn (€1.93tn) by 2030 – with an investment time horizon that IFoA stresses is likely to coincide with greater climate impacts.
The latest advice emphasises the increasing importance UK regulators have placed on climate risk over the last few years in their guidance – such as The Pension Regulator’s 2016 Guide to Investment Governance in which trustees are “minded” that DC schemes are potentially exposed to climate risks.
In its latest Strategy, Budget and Levies, also published this week, the Financial Reporting Council, the UK watchdog, cites climate change as part of the “changing economic and regulatory environment” it will consider when it sets the technical standards for the IFoA.
Both the National Employment Savings Trust (NEST) and HSBC are referenced in the IFoA’s guidance as examples of UK-based DC pensions schemes that have already incorporated climate into their default investment strategies – something the guidance encourages other DC schemes to consider.
The guidance finishes by outlining a series of “actions” that members can undertake to help mitigate the risks that climate change poses, including:

  • Acquire an appropriate level of professional knowledge to understand climate risk, the financial stability implications and how these map onto DC schemes.
  • Consider whether scheme governance committees and trustee boards have appropriate knowledge and understanding of climate risk information.
  • Consider whether the scheme’s self-select funds offer sufficient choice to members with respect to climate risk.

Today, the UK’s Green Finance Taskforce called on regulators to incorporate the Taskforce on Climate-related Financial Disclosures’ recommendations on reporting into guidelines for firms and investors, “to help them fulfil their legal duty”, and to clarify that mitigation against climate risk already falls under existing investor duty laws in the country.

Note: This article was updated to change the word “covenants” to “governance” in paragraph 7.