Climate change risks are financially material and should be considered as part of fiduciary duty, according to a new report.
After many years of debate, pension scheme trustees finally have clarity on fiduciary duty in relation to sustainable investing.
A report published last week by the Financial Markets Law Committee (FMLC) established that trustees can account for sustainability considerations without breaching their fiduciary duty.
The 18-page document said risks associated with climate change and related sustainability factors are considered financially material and so can factored into investment strategies and risk analysis.
The committee was commissioned by the government to clarify the fiduciary duty question as part of its Green Finance Strategy, unveiled last year.
“If pension fund trustees approach their fiduciary obligations today in the context of sustainability and the subject of climate change and with advice and assistance, their approach can be expected in turn to inform how investees measure success and identify, address and monitor risk and return,” the report stated.
“That (and related increased transparency) may in turn help pension fund trustees still further to meet their fiduciary obligations. Sometimes the pension fund may need to initiate this reinforcing process.
“In the time ahead, pension fund trustees will, with advice and assistance, further develop their understanding of the financial risks presented by sustainability and the subject of climate change, as well as related opportunities for value creation. This may reveal additional effective ways of managing risk and supporting returns.”
Long-reaching impact
Maria Nazarova-Doyle, global head of sustainable investment at IFM Investors and a member of the FMLC working group, said the clarification could have “a long-reaching positive impact not just in the pensions industry, but in the real economy as well”.
She continued: “Asserting trustees’ duty to take account of climate change and other relevant sustainability factors as financially material, recommending narrative strategy analysis to supplement the traditional quantitative models given the complexity of such systemic issues, and confirming trustees’ reinforcing role in positive improvements in businesses they invest in via stewardship are just some of the highlights of this groundbreaking review. I believe this paper makes an incredibly important contribution to this ongoing debate.”
Claire Jones, head of responsible investment at LCP, said the report would “go a long way towards clearing up the uncertainty which has hindered this complex topic”, and urged the Department for Work and Pensions and the Pensions Regulator (TPR) to “throw their weight behind it”.
Jones added that all trustees should read the FMLC’s report and “actively consider” climate change risks in their decision-making processes – and not rely purely on consultants or asset managers.
She added that trustees should seek to use their “power as large-scale asset owners to influence governments to do more to prevent and mitigate the effects of climate change” – and the FMLC’s report could prove to be a “catalyst”.
A TPR spokesperson told Pensions Expert: “Climate change and other ESG risks are among a range of factors that may be financially material to schemes. Trustees should ensure their advisers have the appropriate skills and expertise and can fully explain how those factors come together so they can make informed investment decisions.”
A DWP spokesperson said: “We welcome this report by the FLMC and will carefully review its findings. We will work with the sector to establish whether there is a need for further clarification on ESG and hold a series of sector roundtables over the coming months.”
