Retirement savings of millions of members could be hit with significant losses if pension providers do not step up action on climate risks, according to research.
The report by ClientEarth and ShareAction, published 06 March, found those affected would include members signed up under auto-enrolment (AE), and most at risk would be those in a defined contribution default fund.
The responses to letters, sent out by ClientEarth, to 12 pension providers, which represent more than 11 million workplace pension scheme members, in May and June 2017, were compiled by the non-governmental organisations, which found contract-based pension providers had not taken "sufficient action" to address the risks of climate change.
Commenting on the report's findings, ClientEarth pensions lawyer Joanne Etherton, said: "The Financial Conduct Authority (FCA) is failing millions of pension savers with its weak position on climate risk. An industry blind spot has been developing and must be addressed.
"The pensions of millions of savers could be seriously threatened if the FCA does not step up. As the regulator, the FCA, has a duty to protect consumers and we are concerned that its failure to require providers to consider and manage climate risk and keep up with other regulators could amount to a serious underperformance in its duty to savers."
The FCA has confirmed that climate change poses a risk to it meeting its regulatory objectives, said ShareAction senior policy officer Rachel Haworth, but that it was "baffling that it still seems to have no plans to take action on this issue".
"Financial regulators around the world are stepping up to the challenge of protecting financial markets and consumers from the risks associated with climate change. The FCA must not be left behind," she said.
A spokesperson from the FCA said in response: "We take climate risk seriously, and we have been working with other organisations to ensure a coordinated approach by financial regulators on climate-related issues."
ClientEarth and ShareAction called on the FCA to use its upcoming joint pensions strategy with The Pensions Regulator, as well as the opportunity to prepare an adaptation report for the Department for Environment, Food and Rural Affairs, to help close the gap in regulation and to reassure savers that their pension pots are in safe hands.
ShareAction also conducted a wider review of 2017 annual reports published by the independent governance committees (IGCs) tasked with ensuring that contract-based pensions provide value for money to consumers. It found only two IGCs reported on climate risk and, where they did, "insufficient detail was given in relation to the fund's policy or investments". ShareAction and ClientEarth said they received no responses from Fidelity, Old Mutual, Royal London or Phoenix Life.
Meanwhile, only two of the 16 IGCs reviewed - Legal & General and Aviva - reported on the providers' approach to climate risk, but that both reponses could have been more detailed. "We would like to see evidence of how the (Aviva) IGC has challenged the provider to demonstrate its environmental, social, governance (ESG) and stewardship policies, and how these have been implemented in real terms," it said.
Speaking to PP, Aviva pensions governance manager Stuart Gash said: "Aviva's IGC has recognised that we take ESG matters seriously and we are continuing to work with the IGC to make it clear to members how their savings are invested.
"We speak to members and advisers to find out what is important to them in terms of ethical investment. We will continue to work with the IGC to carry out research with advisers and members to gauge attitudes to ethical investment."
A spokesperson from Old Mutual Wealth commented: "Old Mutual Wealth is committed to being a responsible business and a responsible investor. We agree that climate change presents risks and opportunities for investors, companies and individuals.
"From an investor perspective, we have joined the Institutional Investors Group on Climate Change to help us develop our understanding of climate-related risk and opportunity, and work with other like-minded investors to address climate-related investment risks."
A spokesman for Prudential said: "Prudential participated as an Asset Owner in the workshop run by members of the Task Force for Climate-related Financial Disclosures (TCFD) Secretariat and contributed to the consultation on the TCFD's initial recommendations.
We are reviewing our climate-related financial risk management framework and the associated reporting, with a clear focus on what actions are required across the breadth of our business activities to improve transparency on our climate-related financial risks and the management of these risks."
Royal London pensions business head of investment solutions Lorna Blyth, said: "Royal London is aware of the increasing risks that climate change may pose to companies, and in turn its pension holders, so we have been actively monitoring this issue for some time.
In 2015 our sister company RLAM wrote a comprehensive paper on the stranded assets debate which helped form our thinking on climate risk. Since then RLAM has focussed on two main projects. The first is engagement with water companies held in RLAM's fixed income portfolios on climate change and the potential long-term impact on their assets. The second project is engaging with oil and gas utility companies regarding the energy transition."
Fidelity and Phoenix Life have not yet responded to requests for comment.
The report recommends the regulator takes urgent action to address climate risk, and to issue guidance to the firms it regulates, to ensure steps to manage climate risk are being taken and the suitability of pension investment products is up to scratch.
ClientEarth and ShareAction also advised the FCA to require independent governance committees (ICGs) to report on pension providers' climate risk policies in line with recommendations issued by the Law Commission.
"In particular, the FCA should capitalise on the opportunity to develop a pensions regulatory strategy that recognises the importance of a forward-thinking and harmonised approach to climate risk over the next five to 10 years," it stated.
According to the two bodies, Legal and General and Scottish Widows have formally endorsed the report's recommendations.
The report follows an investigation into the UK's top 25 defined benefit pension funds over climate risk mitigation, where the MPs in the Environmental Audit Committee (EAC) sent letters to trustees of schemes with a combined £550bn of assets in order to understand their strategic response to risks associated with climate change, after the government admitted a "widespread misunderstanding" of fiduciary duty.
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