Local Government Pension Scheme (LGPS) members will meet The Pensions Regulator (TPR) next month after lobby groups warned just 12 funds highlighted climate change risks in their investment strategy statements.
It comes after ClientEarth and ShareAction submitted a referral to the watchdog in February to raise concerns over varying standards across the LGPS in assessing and managing these risks faced by global warming.
They believe that numerous administering authorities hold fundamental misconceptions about what the law requires of them. They argue that funds must address climate risk specifically in their investment strategies as climate change poses systemic risks that can affect a fund's whole portfolio.
The groups found just 12 of 76 LGPS funds that published an investment strategy statement (ISS) as of 18 April 2017 specifically mentioned climate risk, and only three mentioned reducing fossil fuel investment.
According to new guidance by the Department for Communities and Local Government on ISSs from 1 April, they should include a policy on how social, environmental or corporate governance (ESG) considerations are taken into account in the selection, non-selection, retention and realisation of investments.
It also said schemes should consider any factors that are financially material to investment performance, including ESG factors, and over the long term.
However, there is no specific mention of climate change or fossil fuel investment in the guidance.
ClientEarth and ShareAction are disappointed the majority of LGPS funds have not taken consideration of TPR's latest investment guidance, which explicitly referenced climate considerations. However, given this guidance was written for trust-based defined benefit (DB) schemes, it is not directly applicable to the LGPS funds, although they can consider it if they wish.
The meeting between members and TPR is likely to take place in June, but a date is yet to be agreed on.
ClientEarth chief executive James Thornton said: "The physical and regulatory risks of climate change to investments are irrefutable. It is troubling that just 12 LGPS funds have addressed climate-related financial risk in their investment strategies."
"Pension funds owe their members an explanation of what's being done to protect their savings. That goes for private and public pension schemes - those LGPS funds clearly falling behind should be looking to remedy this shortcoming swiftly."
ShareAction chief executive Catherine Howarth said: "While some LGPS funds are leading on taking the financial risks associated with climate change into account in their investment processes, many are on the back foot, operating under a number of misconceptions, including legal ones. This is not fair on pension holders. Members' savings should be protected across the board from the very real and emergent risks of climate change."
The lobby groups said LGPS funds for Wiltshire, East Sussex and the Environment Agency demonstrated good examples of ISSs that address climate risk.
Wiltshire's ISS said its 2017 strategy review will look at risks caused by climate change and the associated issue of stranded assets:
"The review will look at the carbon footprint of the fund's equity portfolio and consider reduction options, as well as conducting a temperature rise scenario analysis that may have implications for the fund's future asset allocation. The fund may consider an appropriate process for the management of climate change risk for its active and passive equity mandates."
East Sussex's statement said the fund believes that climate change poses "material risks" to the fund but also presents positive investment opportunities.
Environment Agency ISS said climate change presents "a systemic risk" and "long-term material financial risk" for the fund, which will therefore impact its members, employers and all its holdings in the portfolio.
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