The UK's 25 largest defined benefit (DB) pension funds are being asked how they deal with climate risk after the government admitted a "widespread misunderstanding" of fiduciary duty.
MPs in the Environmental Audit Committee (EAC) have 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.
The letters seek clarity on whether these schemes accept the conclusion of the Task Force on Climate-related Financial Disclosures (TCFD) that pension schemes are potentially exposed to financial risks from climate change, which associated risks they are most concerned about, and whether additional guidance is needed from the government or The Pensions Regulator (TPR) on reporting these risks.
Also, the committee wants to know what actions have been taken, if TCFD recommendations will be built into reporting, and if these schemes have discussed the risks with their actuarial advisers.
The TCFD recommendations include describing how climate-related risks and opportunities are assessed and managed, disclosing the actual and potential impacts, and disclosing the metrics and targets used to assess and manage these risks.
Schemes who have received the letter include the £61bn Universities Superannuation Scheme, £49bn BT Pension Scheme, and £44bn RBS Group Pension Fund.
It comes after the Department for Work and Pensions (DWP) admitted to the EAC's green finance inquiry that there was a "lack of attention and outright misunderstanding" and "confusion" about trustee duties.
EAC chairwoman Mary Creagh said, while DB schemes are being probed, defined contribution (DC) savers could also be exposed to these risks.
"Climate change means insurance firms will be hit with increasing claims related to extreme weather," she said. "Fossil fuel companies could lose value as the world implements the Paris Agreement on climate change to keep to well below two degrees Celsius. Energy companies that do not make a timely low-carbon transition risk being left behind. We want to know what pension funds are doing to safeguard people's pensions from the financial risks of climate change.
"The climate change risks of tomorrow should be considered by pension funds today. A young person auto-enrolled on a pension today may be 45 years away from retirement. Over that timescale, these climate change risks will inevitably grow. We are examining whether pension funds are starting to take these risks into account in their financial decision-making."
Trustees have a fiduciary duty to act in the best interests of their beneficiaries but, the EAC said, this is often misinterpreted as seeking maximum short-term returns, leading to "the neglect of longer-term considerations - including environmental sustainability and climate change-related risks and opportunities".
Pensions and Lifetime Savings Assocation policy lead for stewardship and corporate goverance Luke Hildyard commented: "Numerous credible commentators from institutions such as the Bank of England, Cambridge University and many leading financial services firms have highlighted the major economic impact of climate change and the serious long-term threat that it poses to pension funds' investments. It's definitely an issue that trustees should be making time to discuss and seeking advice on."
The DWP has pledged to clarify legislation around consideration of these long-term financial risks, and schemes' abilities to consider members' non-financial or ethical concerns.
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