Climate change poses severe risk to pension fund investments, claims 90 year old association

| 6th December 2017
Luxury homes submerged in flood water

Damage on the Jersey Shore seen during a visit by Army Gen. Frank Grass, the chief of the National Guard Bureau; Air Force Chief Master Sgt. Denise Jelinski-Hall and other National Guard senior leaders to areas impacted by Hurricane Sandy in New Jersey and New York and to Guard members supporting recovery operations on Nov. 2, 2012.

Army National Guard photo by Sgt. 1st Class Jim Greenhill
The Pensions and Lifetime Savings Association has released new advise for preparing for the impact of climate change on shorter term investments. Cambridge University research suggests 25 percent could be wiped off investments at 2oC of warming, so urgent action is necessary, reports BRENDAN MONTAGUE

Climate change is not just an ethical issue for pension fund governance bodies, but a major threat to financial stability...

Climate change poses severe risks to pension funds’ investments, the Pensions and Lifetime Savings Association (PLSA) has warned, in guidance published today in partnership with environmental law firm ClientEarth.

The guidance notes that climate change is also a serious risk to pension funds’ investments in the short term as well as having the potential of wiping out as much half of global Gross Domestic Product (GDP) by the end of this century.

The latest findings follow a report from Cambridge University estimated that pension-like investment portfolios could suffer a catastrophic and permanent 25 percent loss in the event of a 2°C increase in average global surface temperatures. 

Investment decisions

Senior figures from the Bank of England and The Pensions Regulator have also warned of the threat to financial stability posed by climate change. A PLSA stewardship survey earlier this year found that 76 percent of respondents agree that environment, social and governance (ESG) factors, such as climate change, can be material to investment performance.

The latest PLSA guidance, published today, provides a framework for pension funds to act on climate change. It recommends that funds "should undertake a programme of measures to mitigate risks and take advantage of opportunities relating to climate change".

This would include incorporating climate change expertise into trustee boards and other governance bodies and reviewing how current and prospective asset managers consider climate change as part of their investment decisions, and incorporating this into manager selection processes.

Stewardship activity

It also recommends instructing asset managers to engage with investee companies about any plans to mitigate and adapt to climate change and reporting on their management of climate change-related risk to beneficiaries, using the reporting framework recommended by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD).

Luke Hildyard, the policy lead for stewardship and corporate governance for PLSA, said: “Climate change is not just an ethical issue for pension fund governance bodies, but a major threat to financial stability highlighted by numerous credible economic commentators and rigorous research.

"It is therefore imperative that boards and committees consider the potential impact that climate change will have on their investment portfolios. The PLSA was very encouraged by responses to our stewardship survey. More than 50 percent of respondents told us that they planned to increase stewardship activity in the next year around areas such as climate change".

Energy transition

He added: “This guide represents a substantive programme that pension funds can implement as part of these plans. We hope that it will help governance bodies and give confidence to beneficiaries that risks to their incomes in retirement deriving from climate change are being responsibly managed.”

Natalie Shippen, company and financial lawyer at ClientEarth, said: “Climate change requires consideration by governance bodies as a financial risk – and this is fortunately being recognised industrywide. But until now, a comprehensive ‘how-to’ for the day-to-day management of the issue has been lacking, meaning pensions professionals may be aware of their legal duties but feel ill-equipped to exercise them.

“The PLSA’s new guidance is a one-stop shop for trustees and professional advisers. It is a vital tool for the pensions industry as the physical impacts of climate change intensify and the energy transition gathers speed.”

This Author

Brendan Montague is editor of The Ecologist. He tweets at @EcoMontague.