A number of UK local government pensions scheme (LGPS) members are to meet the country’s pension regulator in July following its decision not to produce more detailed guidance for pension funds on managing climate risk, as requested by some LGPS members earlier this year.
In February, ClientEarth, the environmental law firm and ShareAction, the responsible investment NGO, submitted a legal referral to The Pensions Regulator (TPR) arguing that the 89 LGPS must assess the potential risks of climate change on investment returns.
RI understands that members of a number of large UK pension funds, including the West Yorkshire Pension Fund, supported the referral that called for an investigation by the TPR and the government Department for Communities and Local Government (DCLG).
In the referral, ClientEarth and ShareAction pointed out that there are wide discrepancies in the approach of the 89 LGPS funds to climate risk. Some see it as a material financial risk/return issue to be considered in trustee decisions, while others do little, and defer responsibility to fund managers or engagement specialists.
But, the NGOs say the law is clear that investment decisions such as managing overall portfolio risk and strategic asset allocation are the responsibility of the pension funds alone. The referral also lays out investment evidence and legal opinions as to why climate change presents financial risks.
The referral urges the TPR to publish guidance for all pension funds on what they should be doing to manage climate risk and also highlight schemes that are best practice in managing climate risk, and those failing to meet minimum expected standards.
However, the TPR has said that – while it is sympathetic to the issues raised in the referral – it has decided it needs to prioritise its work on the broader context of governance, including investment governance, rather than address a specific issue.
RI understands that the TPR confirmed its stance at a meeting in April with ShareAction, ClientEarth and the DCLG. Details of the meeting emerged in minutes from a meeting last week held by the LGPS’ Scheme Advisory Board.At the April meeting the TPR and DCLG said they were sympathetic to the issues raised in the referral, and recognized climate risk as an ESG factor that may be financially significant, and therefore considered when determining investment strategy.
In March, the TPR issued investment guidance for defined benefit pension schemes, covering LGPS, which highlighted climate risk.
The TPR said that while it wouldn’t be delivering steps set out in the referral, it would continue to state its public position on climate risk and consider an ‘informal’ communication such as a blog on the issue.
In response, members from funds including East Riding, Hampshire, Leicestershire, London, Surrey, West Yorkshire and Wiltshire have written to the TPR to ask for a discussion on the ShareAction/ClientEarth referral.
RI understands that ShareAction has facilitated the meeting and that it will take place in July.
Rachel Haworth, Policy Officer at ShareAction, said: “ShareAction and ClientEarth appreciate TPR’s collaborative approach and look forward to working with them further. We recognise the significant challenges TPR faces in bringing broader trustee skills and governance up to the necessary standards, and welcome their work in this area. However, the urgency of climate risk is such that members need the regulator to act quickly to mitigate against risks to their savings. We hope that TPR will continue to focus on this area, and take strong action to address the misconceptions we have raised.”
ClientEarth lawyer Megan Clay added: “We were pleased to be able to put our case directly to The Pensions Regulator and hope to continue to work constructively with them. However, it’s important to note that, irrespective of TPR’s actions on climate risk, administering authorities could be in breach of their duties to members where they do not consider climate risk in their investment decision-making.
“These breaches could result in material losses to local government pension scheme investments and – therefore – to members or taxpayers. If this happens, funds could be open to legal challenge.”
Separately, Councillor Roger Phillips, Chair of the Scheme Advisory Board, will also write to the TPR on the matter, according to minutes.